UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VHS NETWORK, INC.
(Exact name of Registrant)
FLORIDA
----------------------------- ---------------------------
(State or jurisdiction of Primary Standard Industrial
incorporation or organization) (Classification Code Number
65-0656668
-----------------
I.R.S. Employer
(Identification No.)
5170 DIXIE ROAD, SUITE 301
MISSISSAUGA, ONTARIO, CANADA
TEL:(905) 238-9398
FAX:(905) 238-9119
(Address and telephone number of principal executive offices)
Copies of all Communications to:
Stewart & Associates
1 First Canadian Place, P.O. Box 160
Suite 700, 100 King Street West
Toronto, Ontario, Canada
Tel: (416) 368-7881
Fax: (416) 368-7805
<PAGE>
Approximate date of proposed sale to the public: from time to time after the
effective date of this Registration Statement
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
==========================================================================
Proposed
Title of each Class of maximum aggregate Amount of
Securities to be Registered offering price registration fee
==========================================================================
==========================================================================
Common Shares (1) $2,073,167 (2) $547.32
==========================================================================
(1) Consists of 4,392,500 issued and outstanding shares of Common Stock, and
5,265,000 shares issuable upon exercise of options and other conversion
privileges to acquire Common Stock. (2) Estimated pursuant to Rule 457 under the
Securities Act of 1933 solely for the purpose of calculating the registration
fee.
VHSN hereby amends this registration statement on such date or dates as may be
necessary to delay its effective date until VHSN shall file a further amendment
which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
2
<PAGE>
Prospectus
November 21, 2000
VHS NETWORK, INC.
9,657,500 Shares of Common Stock
The Selling Securityholders identified in this Prospectus are selling
up to 9,657,500 common shares in the capital of VHS Network, Inc.
("VHSN"). Of such shares, 4,392,500 are currently outstanding and
5,265,000 shares will be issued upon exercise of options and other
conversion rights which have been granted to certain Selling
Securityholders. The shares were issued, or are issuable upon
conversion or exercise of securities which were issued, by VHSN in
private placement transactions.
The Selling Securityholders may sell all or a portion of their shares
through public or private transactions at prevailing market prices or
at privately negotiated prices. VHSN will not receive any part of the
proceeds from the sale of these shares by the Selling Securityholders.
However, VHSN may receive up to $762,500 in the event all of the
options are exercised.
VHSN's common stock was quoted on the NASD OTCBB under the trading
symbol "VHSN" until May 18, 2000 and now trades on the Pink Sheets.
This investment involves a high degree of risk. You should purchase shares only
if you can afford a complete loss of your investment. See "Risk Factors"
beginning on Page 5.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is truthful or complete. Any
representation to the contrary is a criminal offence.
3
<PAGE>
AVAILABLE INFORMATION
You may read and copy any document VHSN files at the SEC's public reference
rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. VHSN's SEC filings will also be publicly available through the SEC's web
site on the Internet at http://www.sec.gov.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Descriptions of any contract or
other document referred to in this Prospectus are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. You may also request
in writing further information from VHSN. Direct your request to VHSN at VHS
Network, Inc., 5170 Dixie Road, Suite 301, Mississauga, Ontario, CANADA,
Attention: Chief Executive Officer, telephone (905) 238-9398 and facsimile (905)
238-9119.
TABLE OF CONTENTS
PAGE
The Offering................................................................. 5
Principal Office..............................................................5
Risk Factors................................................................. 5
Limited History of Operations; History of Losses........................ 5
Internet Start-up Company............................................... 5
Loss of VHSN's Key Management........................................... 6
Voting Control of Officers and Director................................. 6
Limited Market for Stock................................................ 6
Volatile Stock Price.................................................... 6
Stockholders' Equity (Deficit).......................................... 7
Use of Proceeds.............................................................. 7
Selling Securityholders...................................................... 7
Plan of Distribution......................................................... 8
Legal Proceedings............................................................ 9
Directors, Executive Officers, Promoters and Control Persons................ 10
Security Ownership of Certain Beneficial Owners and Management........... 11
Description of Securities................................................... 13
Disclosure of Commission Position of Indemnification........................ 15
Description of Business..................................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 21
Description of Property..................................................... 23
Certain Relationships and Related Transactions.............................. 24
Market for Common Equity and Related Stockholder Matters.................... 24
Executive Compensation...................................................... 26
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 28
Financial Statements........................................................ 28
4
<PAGE>
THE OFFERING
Securities Offered by Selling Securityholders 9,657,500 Shares
Issued and outstanding (4,392,500)
Underlying shares of options
and conversion privileges (5,265,000)
Common Stock Outstanding Prior to the Offering 19,535,268 Shares
Risk Factors This Offering
involves a high
degree of risk.
See "Risk
Factors".
PRINCIPAL OFFICE
Principal Office and Telephone Number
VHS NETWORK, INC.
5170 Dixie Road
Mississauga, Ontario
CANADA L4W 1E3
TEL: (905) 238-9398
FAX: (905) 238-9119
email: [email protected]
RISK FACTORS
Limited History of Operations; History of Losses
VHSN and its subsidiaries have a limited history of operations with periods of
net operating losses. According to VHSN's audited financial statements for the
years ended December 31, 1998 and 1999, VHSN had a net loss of $816,446 and
$525,377, respectively, on revenues of $0. VHSN continued to operate at a loss
during the nine-month period ended September 30, 2000, with a net loss of
$851,144 on revenues of $0.
Internet Start-up Company
VHSN's operations are subject to the risks and competition inherent in the
competitive field of Internet start-up companies. There can be no assurance that
future operations will be profitable. Revenues and profits, if any, will depend
upon various factors including the acceptance of Internet commerce and the
ability of VHSN to launch its electronic commerce business.
5
<PAGE>
Loss of VHSN's Key Management
VHSN depends upon the efforts of Elwin Cathcart, its Chairman and Chief
Executive Officer as well as other key management personnel. Their experience
and industry-wide contacts significantly benefit VHSN. The loss of the services
of these individuals could have a material adverse effect on VHSN's business,
financial condition and results of operations. There is no assurance that VHSN
will be able to maintain and achieve its growth objectives should it lose any of
its key management members' services.
Voting Control of Officers and Directors
VHSN's executive officers and directors beneficially own a significant
percentage of the outstanding shares of common stock. Mr. Cathcart beneficially
owns or controls over 47% of the outstanding shares of common stock. VHSN's
officers and directors currently are, and in the foreseeable future will
continue to be, in a position to control VHSN by being able to nominate and
elect VHSN's board of directors. The board of directors establishes corporate
policies and has the sole authority to nominate and elect VHSN's officers to
carry out those policies. Prospective investors therefore will have limited
participation in VHSN's affairs.
Limited Market for Stock
VHSN's common stock was quoted on the NASD Over-the-Counter Bulletin Board until
on or about May 18, 2000 and is currently trading on the Pink Sheets. Trading
has been limited and it is uncertain as to whether a more regular trading market
will develop. Since the shares are not currently listed on a national exchange,
they are subject to Rule 15g-9 under the Securities Exchange Act of 1934. That
rule imposes additional sales practice requirements on broker-dealers that sell
low-priced securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
the sale. Consequently, the rule affects the ability of broker-dealers to sell
the shares and thus prospective investors may find it difficult to re-sell their
shares.
Volatile Stock Price
As of the date of this Prospectus, there were 19,535,268 outstanding shares of
common stock of which approximately 5,916,575 shares were eligible for public
trading. The trading market for VHSN's common stock may be adversely affected by
the subsequent influx into the market of the 9,657,500 shares of common stock
being registered for resale hereunder. This increase in the number of shares
available for public sale, or even the potential of such sales, could decrease
the market price of the shares.
6
<PAGE>
Stockholders' Equity (Deficit)
Total shareholders' deficit for the year ended December 31, 1999 was $1,960,929
and for the period ended September 30, 2000 total shareholders' equity was
$644,295. In the event of a dissolution or wind up, VHSN would return little or
no net assets to the shareholders.
USE OF PROCEEDS
VHSN will not receive any proceeds upon the sale of shares by the Selling
Securityholders. However, this Prospectus relates to the sale of up to 2,000,000
shares of VHSN's common stock that may be issued in the event of the exercise of
outstanding options held by Selling Securityholders. If all such options are
exercised, VHSN would receive proceeds of $762,500. Such proceeds would be used
for working capital.
SELLING SECURITYHOLDERS
The Selling Securityholders may offer all or part of their shares for resale
from time to time. However, the Selling Securityholders are under no obligation
to either (a) exercise the Selling Securityholders' options and/or conversion
privileges, as the case may be, or (b) if exercised, to sell all or any portion
of such shares of common stock immediately under this Prospectus. Therefore, no
estimate can be given as to the number of shares of common stock that are or
will be held by any Selling Securityholder without making certain assumptions.
Table 1 below sets forth the name of each Selling Securityholder; the maximum
number of shares of common stock beneficially owned by such Selling
Securityholder as of the date of this Prospectus, (assuming the exercise of
options or conversion privileges into shares of common stock); the number of
shares being offered for sale by each Selling Securityholder; and the number of
shares beneficially owned by such Selling Securityholder after this offering
(assuming the sale of all shares of common stock by the Selling Securityholder
following the date of this Prospectus).
All expenses of the registration of the common stock on behalf of the Selling
Securityholders are being borne by VHSN. The costs are summarized as follows:
-------------------------------------------------------------
Item Cost
-------------------------------------------------------------
Registration Fee $547.32
---------------------------------------- ---------------------
Federal Taxes 0
-------------------------------------------------------------
State Taxes and Fees 0
-------------------------------------------------------------
Transfer Agent's Fees 0
-------------------------------------------------------------
Printing and Engraving* $5,000
-------------------------------------------------------------
Legal Fees* $25,000
-------------------------------------------------------------
Accounting Fees* $10,000
-------------------------------------------------------------
* estimated amount
7
<PAGE>
<TABLE>
<CAPTION>
Table 1
-------------------------------- -------------------- --------------------- ---------------------
Selling Securityholder Maximum Number of Number of Shares Number of Shares
Shares Owned Being Offered Owned After the
Before Offering Offering
-------------------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C>
Groupmark Canada Limited(1) 7,900,000 1,000,000 6,900,000
(35%)
-------------------------------- -------------------- --------------------- ---------------------
Elwin Cathcart(1) 1,370,000 500,000 870,000
(4%)
-------------------------------- -------------------- --------------------- ---------------------
David J. Smelsky(2) 685,000 685,000 0
-------------------------------- -------------------- --------------------- ---------------------
Thomas Roberts(3) 500,000 500,000 0
-------------------------------- -------------------- --------------------- ---------------------
Forte Management Corp. 1,500,000 1,500,000 0
-------------------------------- -------------------- --------------------- ---------------------
Gang Chai(4) 1,048,502 1,048,502 0
-------------------------------- -------------------- --------------------- ---------------------
Qin Lu Chai 1,048,498 1,048,498 0
-------------------------------- -------------------- --------------------- ---------------------
QingWang 1,022,000 1,022,000 0
-------------------------------- -------------------- --------------------- ---------------------
Tai Xue Shi 1,022,000 1,022,000 0
-------------------------------- -------------------- --------------------- ---------------------
Charles He(5) 1,274,000 1,274,000 0
-------------------------------- -------------------- --------------------- ---------------------
Alexander Stewart(6) 50,000 50,000 0
-------------------------------- -------------------- --------------------- ---------------------
Hofheimer Gartlir & Gross 7,500 7,500 0
LLP(7)
-------------------------------- -------------------- --------------------- ---------------------
Total 9,657,500(8)
-------------------------------- -------------------- --------------------- ---------------------
</TABLE>
(1) Elwin Cathcart is a director and officer of VHSN as well as a director,
officer and sole shareholder of Groupmark Canada Limited. The 500,000
shares being registered by Elwin Cathcart consist of 250,000 shares
underlying options to purchase common shares at an exercise price of $0.35
per share expiring December 31, 2001 and 250,000 issued and outstanding
common shares.
(2) David Smelsky is a director and officer of VHSN.
(3) Thomas Roberts is a director of VHSN.
(4) Gang Chai is a director of VHSN.
(5) Charles He was an employee of Groupmark Canada Limited and provided
services to VHSN pursuant to the management agreement between Groupmark
and VHSN until he left VHSN in August, 2000 (See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS")
(6) Alexander Stewart is the principal of the law firm Stewart & Associates
which provides legal services to VHSN.
(7) Hofheimer Gartlir & Gross is a law firm that provided legal services to
VHSN.
(8) This figure includes 2,000,000 options outstanding; 4,015,000 common
shares of VHSN into which 4,015,000 Class B Special Shares of China eMall
Corporation (a subsidiary of VHSN) are exchangeable (See "DESCRIPTION OF
BUSINESS - China eMall Business"); and 4,392,500 issued and outstanding
common shares of VHSN.
PLAN OF DISTRIBUTION
The sale of the common stock by the Selling Securityholders may be effected from
time to time in various transactions (which may include block transactions by or
for the account of the Selling Securityholders). Alternatively, the Selling
Securityholders may from time to time offer such securities through dealers or
agents. The distribution of the securities by the Selling Securityholders may be
effected in one or more transactions that may take place on the over-the-counter
market, including ordinary broker's transactions, privately-negotiated
8
<PAGE>
transactions or through sales to one or more broker-dealers for resale of such
shares as principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Usual and
customary or specifically negotiated brokerage fees or commissions may be paid
by the Selling Securityholders in connection with such sales or securities.
The securities offered by the Selling Securityholders may be sold by one or more
of the following methods, including without limitation (a) a block trade in
which a broker or dealer so engaged will attempt to sell the shares as agent but
may position and resell a portion of the block as principals to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions where the broker solicits purchases; and
(d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Securityholders may arrange for other brokers or dealers to participate. The
Selling Securityholders and intermediaries through whom such securities are sold
may be deemed "underwriters" within the meaning of the Securities Act of 1933
with respect to the securities offered, and any profits realized or commission
received may be deemed underwriting compensation.
At the time a particular offer of the securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares of common stock being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for the shares of
common stock purchased from the Selling Securityholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
VHSN has informed the Selling Securityholders that the anti-manipulative rules
under the Securities and Exchange Act of 1934, including Regulation M
thereunder, may apply to their sales in the market and have furnished each of
the Selling Securityholders with a copy of these rules.
VHSN has also informed the Selling Securityholders of the need for delivery of
copies of this Prospectus in connection with any sale of securities registered
hereunder.
LEGAL PROCEEDINGS
VHSN is aware that the Internal Revenue Service subpoenaed records from its
transfer agent. Through discussions with the IRS, VHSN has been informed that
the IRS is investigating a former director of a corporation that merged with
VHSN.
9
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Elwin D. Cathcart
Mr. Cathcart, age 73, has been a director and Chief Executive Officer of VHSN
since April 1997. Over the last 5 years, Mr. Cathcart has also been serving as
Chairman and Chief Executive Officer of Groupmark Canada Limited, a private
marketing company specializing in direct mail service products which he founded
in 1970. From 1970 to 1972, Mr. Cathcart served as President of the Canadian
Direct Mail Marketing Association, a Toronto based company he helped found in
1969, and where he continues to serve in an advisory capacity as a Life Member.
From 1960 to 1970, Mr. Cathcart served as National Sales Manager for Canada and
then became National Sales Manager for the United States, for a private direct
mail marketing company known as R.L. Polk & Co., located in Detroit, Michigan.
Mr. Cathcart has served on the board of several public companies including
Equity Investment Corp., a financial marketing company; TelSoft Mobile Data
Inc., a company which purchased priority software for Motorola; The Equity
Group, a holding company for Equity Investments Corp. and TelSoft Mobile Data
Inc.; and Pacific Gold Corp., a west coast mining company. Mr. Cathcart attended
Riverdale College from 1942 to 1943 and received a Bachelors Degree in
Industrial Design from Ontario College of Art in 1950.
Thomas Roberts
Mr. Roberts, age 64, has been a director of VHSN since December, 1996. For the
past 37 years he has been an accountant in private practice. Mr. Roberts
attended Alberson Graughon College and the University of Alabama Birmingham in
1954 and 1955, respectively.
David Smelsky
Mr. Smelsky, age 42, has been an officer and a director of VHSN since April
1997. Mr. Smelsky was the Chief Financial Officer of Groupmark Canada Limited
from November 1994 to October 1999. Since October 1999 he has been the Manager
of Finance and Administration for Halton Hills Hydro Commission. Mr. Smelsky
received his certificate as Certified Management Accountant of Ontario in 1985.
Gang Chai
Dr. Chai, age 41, obtained his Bachelor and Masters in geoscience from China
University in 1987 and 1985, respectively. After moving to Canada in 1987, Dr.
Chai attended University of Toronto where he received a Ph.D. in economic
geology in 1992. Dr. Chai has been a director of VHSN since April 12, 2000.
Prior to founding China eMall Corporation in 1994, Dr. Chai worked for private
Canadian companies, and both the Ontario and federal governments. Dr. Chai is a
director and Chief Executive Officer of McVicar Minerals Ltd., which he founded
in 1997. McVicar Minerals Ltd. trades on the Canadian Venture Exchange under the
symbol MVR.
10
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Directors and Officers
Table 2 sets forth certain information regarding the number and percentage of
shares of VHSN's common stock beneficially owned or deemed to be owned by the
officers and directors of VHSN, individually and as a group based on 19,535,268
common shares outstanding on October 17, 2000. VHSN believes that the
individuals listed below have the sole power to vote and dispose of the number
of shares set forth opposite their respective names unless otherwise indicated.
No preferred shares are outstanding as of the date hereof.
<TABLE>
<CAPTION>
Table 2
---------------- -------------------------------- ------------------------ --------------------
Title of Class Name and Address of Beneficial Amount and Nature of Percentage
Owner Beneficial Owner of Class
---------------- -------------------------------- ------------------------ --------------------
<S> <C> <C> <C>
Elwin D.
Common Cathcart 9,270,000(1) 47.4%
1400 Dixie Road
Mississauga, Ontario L5E 3E1
---------------- -------------------------------- ------------------------ --------------------
Gang Chai
Common 89 Drewry Avenue 1,048,502(2) 5.4%
Toronto, Ontario M2M 1E1
---------------- -------------------------------- ------------------------ --------------------
David
Common Smelsky 685,000(3) 3.5%
RR#4 Rockwood, Ontario
Canada N0B 2K0
---------------- -------------------------------- ------------------------ --------------------
Thomas
Common Roberts 500,000(4) 2.6%
P.O. Box 128
Fayette AL 35555
================ ================================ ======================== ====================
Common All officers and directors as 11,503,502 58.9%
a Group (4 individuals)
---------------- -------------------------------- ------------------------ --------------------
</TABLE>
(1) Consists of 7,900,000 common shares owned by Groupmark Canada Limited which
is a wholly owned corporation of Elwin D. Cathcart; 370,000 common shares
held directly by Elwin D. Cathcart and options to purchase 1,000,000 common
shares granted to Elwin D. Cathcart (750,000 options at an exercise price
of $0.40 expiring December 31, 2002 and 250,000 options at an exercise
price of $0.35 expiring December 31, 2001).
(2) Consists of 350,000 common shares and conversion privileges of Class B
Special Shares of China eMall Corporation, into 698,502 common shares. VHSN
acquired China eMall Corporation pursuant to a share exchange agreement
wherein the shareholders of China eMall including, Dr. Chai, received Class
B Special Shares of China eMall Corporation that are exchangeable on a one
for one basis into common shares of VHSN. (See "DESCRIPTION OF BUSINESS -
Acquisition of China eMall")
(3) Consists of options to purchase 500,000 common shares (250,000 options at
an exercise price of $0.40 expiring December 31, 2002 and 250,000 options
at an exercise price of $0.35 expiring December 31, 2001) and 185,000
common shares.
(4) Consists of options to purchase 500,000 common shares (250,000 options at
an exercise price of $0.40 expiring December 31, 2002 and 250,000 options
at an exercise price of $0.35 expiring December 31, 2001).
11
<PAGE>
Shareholders Owning Over 5%
Table 3 sets forth certain information regarding the number and percentage
of shares of VHSN's common stock owned or deemed to be owned by any person
known by VHSN to be the beneficial owner of more than five percent of
VHSN's common shares based upon 19,535,268 common shares outstanding on
October 17, 2000. VHSN believes that the individuals listed below have the
sole power to vote and dispose of the number of shares set forth opposite
their respective names.
<TABLE>
<CAPTION>
Table 3
------------- ------------------------------------- -------------------- --------------------
Shares Name and Address of Amount and Nature Percentage
Beneficial Owner of Beneficial Owner of Class
------------- ------------------------------------- -------------------- --------------------
<S> <C> <C> <C>
Common Elwin D. Cathcart 9,270,000(1) 47.4%
1400 Dixie Road
Mississauga, Ontario
Canada L5E 3E1
------------- ------------------------------------- -------------------- --------------------
Common Rogue-Mountain Corp.(8) 1,259,993 6.4%
13065 Riverdale Drive NW
Coon Rapids, MN 55448
------------- ------------------------------------- -------------------- --------------------
Common Forte Management Corp. (9) 1,500,000(2) 8.0%
Buckingham Square, Penthouse
West Bay Road, SMB
P.O. Box 1159GT
West Bay Road, SMB
Grand Cayman, Cayman Islands, BWI
------------- ------------------------------------- -------------------- --------------------
Common Charles He 1,274,000(3) (10) 6.5%
56 Temperance Street, Suite 501
Toronto, Ontario
Canada, M5H 3V5
------------- ------------------------------------- -------------------- --------------------
Gang Chai 1,048,502(4) (10) 5.4%
Common 89 Drewry Avenue
Toronto, Ontario
Canada M2M 1E1
------------- ------------------------------------- -------------------- --------------------
Qin Lu Chai 1,048,498(5) (10) 5.4%
Common 89 Drewry Avenue
Toronto, Ontario
Canada M2M 1E1
------------- ------------------------------------- -------------------- --------------------
Qing Wang 1,022,000(6) (10) 5.2%
Common 18 Hollywood Ave.
Suite 900
North York, Toronto
Canada M4P 2B1
------------- ------------------------------------- -------------------- --------------------
Tai Xue Shi 1,022,000(7) (10) 5.2%
Common 18 Hollywood Ave.
Suite 900
North York, Toronto
Canada M4P 2B1
------------- ------------------------------------- -------------------- --------------------
</TABLE>
12
<PAGE>
(1) Consists of 7,900,000 common shares owned by Groupmark Canada Limited
which is a wholly owned corporation of Elwin D. Cathcart, 370,000
issued and outstanding common shares held by Elwin D. Cathcart and
options to purchase 1,000,000 shares granted to Elwin D. Cathcart
(750,000 options at an exercise price of $0.40 expiring December 31,
2002 and 250,000 options at an exercise price of $0.35 expiring
December 31, 2001).
(2) Consists of 1,500,000 issued and outstanding common shares.
(3) Consists of conversion privileges of 1,274,000 Class B Special Shares
of China eMall Corporation exchangeable into 1,274,000 common shares of
VHSN.
(4) Consists of conversion privileges of 698,502 Class B Special Shares of
China eMall Corporation exchangeable into 698,502 common shares of VHSN
and 350,000 common shares of VHSN.
(5) Consists of conversion privileges of 698,498 Class B Special Shares of
China eMall Corporation exchangeable into 698,498 common shares of VHSN
and 350,000 common shares of VHSN.
(6) Consists of conversion privileges of 672,000 Class B Special Shares of
China eMall Corporation exchangeable into 672,000 common shares of VHSN
and 350,000 common shares of VHSN.
(7) Consists of conversion privileges of 672,000 Class B Special Shares of
China eMall Corporation exchangeable into 672,000 common shares of VHSN
and 350,000 common.
(8) The principal beneficial owner of Rogue-Mountain Corp. is David
Sorensen. The transfer agent for VHSN shows Rogue-Mountain Corp. as the
registered owner of 1,259,993 common shares however VHSN has been
informed by Rogue-Mountain Corp. that it is only the beneficial owner
of approximately 50,000 common shares.
(9) The principal beneficial owners of Forte Management Corp. are Leif
Bristow of Toronto, Ontario and Alexander Bristow of Bali.
(10) VHSN acquired China eMall Corporation pursuant to a share exchange
agreement wherein the shareholders of China eMall received Class B
Special Shares of China eMall that are exchangeable on a one-for-one
basis into common shares of VHSN for no further consideration. (See
"DESCRIPTON OF BUSINESS - Acquisition of China eMall").
DESCRIPTION OF SECURITIES
Authorized Capital
VHSN is presently authorized to issue 100,000,000 common shares with a par value
of $0.001 and 25,000,000 preferred shares with a par value of $0.001. As of
October 17, 2000 there were 19,535,268 common shares issued and outstanding and
nil preferred shares issued and outstanding.
Common Shares
Each common share entitles the holder thereof to one vote on each matter with
respect to which shareholders have the right to vote, to fully participate in
all shareholder meetings, and to share ratably in the net assets of VHSN upon
liquidation or dissolution, but each such share shall be subject to the rights
and preferences of the preferred shares.
Preferred Shares
The articles of incorporation of VHSN provide that preferred shares may be
issued from time to time in one or more series. The holders of shares of each
series are entitled to receive cash dividends and at such rate per annum as
declared by the board of directors. The preferred shares are redeemable at the
option of VHSN.
13
<PAGE>
No preferred shares have been issued as of the date hereof.
Options to Purchase Common Shares
In 1997 VHSN granted 250,000 stock options to each of the three directors, Elwin
Cathcart, David Smelsky and Thomas Roberts with an exercise price of $0.35 per
share. The options vested immediately and expire on December 31, 2001.
In 1998 VHSN granted 250,000 stock options to each of David Smelsky and Thomas
Roberts, and 750,000 stock options to Elwin Cathcart at an exercise price of
$0.40 per share. The options vested immediately and expire on December 31, 2002.
The stock options were non-qualified stock options. The options were granted at
the fair market value of the stock as determined by the board of directors.
Warrants
On April 12, 2000 VHSN completed a private placement of 1 unit of VHSN for
aggregate proceeds of $110,000. The unit consisted of:
(i) 550,000 common shares of VHSN;
(ii) 400,000 class A share purchase warrants each exercisable for one common
share of the Corporation at an exercise price of $0.35 per common share
expiring on June 11, 2000;
(iii) 500,000 class B share purchase warrants each exercisable for one common
share of the Corporation at an exercise price of $0.50 per common share
expiring on July 11, 2000;
(iv) 200,000 class C share purchase warrants each exercisable for one common
share of the Corporation at an exercise price of $0.60 per common share
expiring on August 10, 2000; and
(v) 125,000 class D share purchase warrants each exercisable for one common
share of the Corporation at an exercise price of $0.95 per common share
expiring on October 9, 2000.
Each warrant is exercisable into one fully paid and non-assessable common share
of VHSN upon completion and execution of a subscription agreement and payment of
the appropriate purchase price. The terms of the warrants provide that the
warrants are transferable only in accordance with the provisions of the
securities legislation of the jurisdiction in which such transfer shall take
place and include an anti-dilution provision in the case of a subdivision,
consolidation or other change in number of common shares or any reorganization,
merger, amalgamation, dissolution or sale of all or substantially all of VHSN's
assets, so as to maintain the relative rights of the warrant holder to purchase
a number of common shares equal to the number of common shares of VHSN
represented by such warrant certificate had such event not taken place.
14
<PAGE>
As of October 9, 2000, Forte Management Corp. had exercised 250,000 warrants for
aggregate proceeds to VHSN of $105,000 and the remaining 975,000 warrants
expired unexercised.
Dividends
VHSN does not have a formal stock option plan however stock options have been
granted to its officers and directors.
Dividends, if any, will be contingent upon VHSN's revenues and earnings, if any,
capital requirements and financial conditions. The payment of dividends, if any,
will be within the discretion of VHSN's board of directors. VHSN presently
intends to retain all earnings, if any, for use in its business operations and
accordingly, the board of directors does not anticipate declaring any dividends.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
VHSN's articles of incorporation and by-laws provide that VHSN shall indemnify
any person, who was or is a party to a proceeding by reason of the fact that he
is or was a director, officer, employee or agent of VHSN, or is or was serving
in a similar capacity at the request of VHSN, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with such
proceeding if he acted in good faith and in a manner he reasonably believed to
be or not opposed to the best interests of VHSN, in accordance with, and to the
full extent permitted by law.
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Securities Act") may be permitted to directors, officers and controlling
persons of VHSN pursuant to the foregoing provisions or otherwise, VHSN has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by VHSN of expenses incurred or paid by a director, officer or
controlling person in a successful defense of any action, suit or proceeding) is
asserted by a director, officer or controlling person in connection with the
securities being registered, VHSN will, unless in the opinion of its counsel,
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
15
<PAGE>
DESCRIPTION OF BUSINESS
Business Development
Incorporation
VHSN, a Florida corporation, was incorporated pursuant to articles of
incorporation dated December 18, 1995, under the name Ronden Vending Corp.
Acquisition of Video Home Shopping, Inc.
On December 24, 1996 and January 9, 1997, VHSN (then called Ronden Vending
Corp.) completed a two step merger transaction that resulted in the acquisition
of Video Home Shopping, Inc. (a Tennessee corporation). At the time, Video Home
Shopping, Inc. was a network marketing and distribution company which offered a
wide range of products and services to consumers through the medium of video
tape. It was intended that video home shopping be the principal focus of VHSN's
business however after the merger VHSN decided not to continue with the business
operations of Video Home Shopping, Inc. and became inactive.
Name Change
On January 9, 1997, articles of amendment were filed to change the name of VHSN
from Ronden Vending Corp. to VHS Network, Inc.
Acquisition of VHS Network Inc.
On April 9, 1997, VHSN incorporated VHS Acquisition, Inc. as a wholly-owned
subsidiary. In April, 1997, VHSN completed a transaction that resulted in the
acquisition of, VHS Network Inc., (a Manitoba, Canada private corporation). The
sole shareholder of VHS Network Inc. (the Manitoba corporation) was Groupmark
Canada Limited ("Groupmark"). Groupmark received 8,000,000 common shares of VHSN
and a secured promissory note for $500,000 and thus became the controlling
shareholder of VHSN. As a result of the transaction all the directors of VHSN,
except Thomas Roberts resigned and Elwin D. Cathcart and David Smelsky were
appointed directors of VHSN.
Rule 504 Offering (1997/1998)
On or about April 28, 1997, VHSN, under its current management, commenced a
private placement of its common shares under Rule 504 of Regulation D
promulgated under the Securities Act of 1933. VHSN raised proceeds of
$416,492.50 under this offering.
Share Combination
On November 20, 1997, the board of directors of VHSN approved the combination
(consolidation) of its issued and outstanding common shares on a basis of 1 new
post-combination share for every 20 pre-combination shares. The share
combination was effected by a written action of the board of directors without
shareholder approval and did not require an amendment to the articles.
16
<PAGE>
Acquisition of Lithographic Prints
On May 14, 1998, VHSN issued 1,399,992 common shares to Rogue-Mountain Corp. in
an arm's length transaction for the purchase of inventory for resale valued at
$139,999. The inventory consists of full colour lithographic prints from a sold
out limited edition release, "The Andover Series" by artist Jim Perleberg. As of
October 18, 2000 none of this inventory has been sold.
Rule 504 Offering (1999/2000)
In December, 1999, VHSN commenced another private placement of its common shares
under Rule 504 of Regulation D promulgated under the Securities Act of 1933 and
section 203 (t) of the Pennsylvania Securities Act of 1972. VHSN raised proceeds
of $950,000 pursuant to this offering and issued shares for services valued at
$50,000. This offering terminated in March, 2000.
Acquisition of China eMall
On April 12, 2000, VHSN acquired all the issued and outstanding common shares of
China eMall Corporation, an Ontario private company. China eMall is an emerging
business-to-business e-commerce Internet. (See "China eMall Business" below).
VHSN acquired all of the issued and outstanding common shares of China eMall
Corporation pursuant to a share exchange agreement made between VHSN, China
eMall Corporation, Uphill Capital Inc., GDCT Investment Inc., Gang Chai, Qin Lu
Chai, Qing Wang, Tai Xue Shi, Charles He and Forte Management Corp. (the "Share
Exchange Agreement"). The common shares of China eMall were held by five
individual shareholders and three corporations. Two of the corporate
shareholders, GDCT Investment Limited and Uphill Capital Inc., were holding
companies whose only activities were holding shares of China eMall. VHSN
purchased all the issued and outstanding shares of GDCT Investment Limited and
Uphill Capital Inc. and thus indirectly acquired the shares of China eMall held
by these companies. The shareholders of GDCT Investment Limited and Uphill
Capital Inc. received common shares of VHSN pursuant to the Share Exchange
Agreement. The other corporate shareholder, Forte Management Corp., received
common shares of VHSN in exchange for its shares of China eMall.
All the shareholders of China eMall who are individuals (the "Individual
Vendors") received Class B Special Shares of China eMall that are exchangeable
on a one for one basis for common shares of VHSN for no further consideration.
In total, VHSN issued 2,100,000 common shares on closing and has allotted
4,015,000 common shares for issuance when the Class B Special Shares are
exchanged into common shares of VHSN. The holders of the Class B Special Shares
can exchange any or all of their Class B Special Shares into common shares of
VHSN at any time, however, if any Class B Special Shares remain issued and
outstanding after the expiration of the earlier of (a) three years from the date
on which a Form SB-2 or similar filing has been filed with the SEC with respect
to the common shares of VHSN and the SEC has reached a position of no further
comment, and (b) five years after which such Exchangeable Shares were issued,
then China eMall Corporation may redeem the Class B Special Shares on payment of
one common share of VHSN for each Class B Special Share.
17
<PAGE>
The transaction was structured in this way to allow the Individual Vendors to
postpone the realization of capital gains tax pursuant to the Income Tax Act
(Canada) on the sale of their China eMall common shares. Since the Individual
Vendors' common shares were converted into Class B Special Shares of China
eMall, any capital gain on the disposition of the China eMall common shares will
be deferred until the Class B Special Shares are converted into common shares of
VHSN.
Acquisition of Exodus
Pursuant to an Agreement and Plan of Reorganization dated May 6, 2000 VHSN
acquired all the outstanding shares of common stock of Exodus Acquisition
Corporation, a California corporation, from the shareholder thereof in exchange
for an aggregate of 500,000 shares of common stock of VHSN. The sole shareholder
of Exodus was BAC Consulting Corporation ("BAC Consulting"). There was no prior
relationship between VHSN and BAC Consulting or the principals of BAC
Consulting. As a result, Exodus became a wholly-owned subsidiary of VHSN. The
acquisition was intended to qualify as a reorganization within the meaning of
Section 368 (a) (1) (B) of the Internal Revenue Code of 1986, as amended. Upon
effectiveness of the acquisition, pursuant to Rule 12g-3(a) of the General Rules
and Regulations of the Securities and Exchange Commission, VHSN would have
become the successor issuer to Exodus for reporting purposes under the
Securities and Exchange Act of 1934 (the "Act"). Exodus has had no operating
history nor any revenues or earnings from operations and it has no significant
assets or financial resources.
Business of Issuer
Over the last two years VHSN has positioned itself to identify technologies and
market opportunities in the United States, Canada and abroad in Internet and
interactive media electronic commerce and smartCARD loyalty marketing.
China eMall Business
VHSN recently acquired all the common shares of China eMall Corporation, a
corporation incorporated pursuant to the Business Corporations Act (Ontario).
China eMall is an e-commerce company that intends to provide Internet marketing
and information services to facilitate trade between Chinese and western
businesses. China eMall's primary focus is to establish an on-line presence to
facilitate the export of Chinese products and services to western consumers.
18
<PAGE>
History
China eMall was incorporated on February 5, 1999 and was established by Dr. Gang
Chai, and two partners, Dr. Charles He, a computer expert, and Ms. Qing Wang a
veteran Chinese businesswoman. In April, 1999, the initial China eMall website,
based on a software platform Intershop, was built and began test functioning. In
August 1999, China eMall signed an initial supply agreement with Wangfujing
Department Store Ltd. of China and supplied personnel to assist in product
photo-sampling, scanning and data inputting, and an upgraded version of China
eMall's website was built. In November 1999, China eMall contemplated
introducing services in addition to its product line. On April 12, 2000, all the
issued and outstanding common shares of China eMall were acquired by VHSN.
Products - Manufactured Goods
China eMall will offer a complete spectrum of products that are catalogued and
organized under twenty categories that appear on the home page of the website
www.china-emall.com as follows: Agriculture; Apparel; Arts & Crafts; Chemical
Industry; Communications & Transportation; Construction & Decoration;
Electronics; Energy & Mineral Resources; Entertainment; Food; Health & Medicine;
Home & Garden; Industrial Supplies; Jewelry, Clocks & Watches; Office Supplies;
Pet Supplies; Security; Sports; Textiles, Silk; and Toys. As of November 21,
2000 no sales by the China-eMall business have been made even though the website
can be used as "catalogue" for off-line sales.
Internet Services
China eMall also intends to offer a broad range of China based services and
opportunities such as business information services, professional services,
financial services, and travel, immigration, translation and other services.
Business Strategy
China eMall's management intends to establish an e-commerce center to link China
with western business markets using the following strategies:
Short Term
o Selecting initial products from brand suppliers;
o Outsourcing exporting duties to suppliers and importing duties to
importing agencies;
o Building up a marketing and sales infrastructure;
o Identifying and establishing services for western companies; and
o Marketing China eMall as a brand e-commerce name in North America.
Long Term
o Broadening product base;
o Increasing the proportion of retail purchases;
o Expanding services; and
o Using China eMall's web site as a host web site for Chinese businesses.
19
<PAGE>
Competition
The business of China eMall Corporation will compete with the traditional export
market including wholesalers and distributors as well as with other Internet
wholesalers and distributors, such as meetChina.com. This industry has a number
of well-established competitors including national, regional and local companies
within and outside China possessing greater financial, marketing, personnel and
other resources than China eMall. There is no assurance that the China eMall
will be able to market or sell its products and services if faced with direct
product and services competition from these larger and more established
wholesalers and distributors.
SmartCARD Business
VHSN intends to engage in the sale of computer chip-based plastic access cards
that utilize VHSN's proprietary smartCARD technology. This technology enables
the cards to be used for identification purposes and for debit or charge card
purposes. VHSN intends to focus its marketing efforts on companies that wish to
distribute these cards to their customers as a reward for their loyalty. An
example of a loyalty program card is a department store card used to store
information about previous purchases by the customer or the customer's name,
address, birthday or other personal information.
Groupmark Canada Limited owns the registered trade-mark "smartCARD" in Canada
and has a pending application in the United States. Groupmark Canada has granted
VHSN a license to use the trade-mark smartCARD to manufacture and market
smartCARDS world-wide on a non-exclusive basis and to utilize the technology and
other know-how related to smartCARDs, until January 1, 2010. The license
agreement also grants the right to VHSN to permit others to manufacture the
smartCARDs. Pursuant to the terms of the license agreement VHSN will pay to
Groupmark a royalty of 5% of net sales of products using the smartCARD
trade-mark and technology.
Competition
There are several companies who engineer, design and market applications for
chip-based cards, with greater financial, personnel, marketing and sales
resources than VHSN. However, these companies focus the marketing of these cards
for security and debit or charge card purposes, whereas VHSN will market these
cards as a loyalty reward to a company's customers.
Suppliers
VHSN's success as a marketer of e-commerce products depends on its ability to
obtain a reliable source of products and then locate retailers who wish to
purchase these products. There are over a dozen companies that manufacture the
chip that is used in smartCARDs and several companies that put together the chip
and the plastic card to produce a smartCARD. VHSN believes it can obtain
smartCARDS from up to six different suppliers depending on the type of card that
is needed.
20
<PAGE>
Research and Development.
During the last two fiscal years VHSN has spent significant time on research and
development activities. VHSN spent approximately $135,000 in 1998 and $115,000
in 1999 on research and development.
Employees
VHSN employs the services of 5 full time employees which are provided to VHSN
through the management services agreement with Groupmark Canada Limited.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
The information in this section should be read together with the financial
statements that are included elsewhere in this Prospectus.
Going Concern
VHSN is in the development stage and has generated virtually no revenues and has
not attained profitability. Its continued existence and its ability to continue
as a going concern are dependent upon its ability to obtain additional capital
to fund its operations.
Goals and Objectives
VHSN's goals and objectives are centered on the ability to identify technologies
and market opportunities in the United States, Canada and abroad in Internet and
interactive media e-commerce and smartCARD loyalty marketing. To achieve its
goals, VHSN is developing its supplier base and its web site,
www.china-emall.com, so that it will be in a position to attract purchasing and
revenues. It is at the same time investigating companies from which it can
acquire technology with proven financial performance, where joint ventures or
acquisitions may also be possible.
Cash Requirements
The issuer will need to raise additional funds in the next 12 months to satisfy
its cash requirements. VHSN intends to raise additional funds and pursue
acquisitions with revenue potential.
Employees
VHSN may experience significant changes in the number of employees in the next
12 months.
21
<PAGE>
Results of Operations
Results of nine months ended September 30, 2000.
Revenues for the nine months ended September 30, 2000 were $0. Operating
Expenses for the nine months ended September 30, 2000 were $859,220.
Results of years ended December 31, 1999 and December 31, 1998
Revenues for both years ended December 31, 1999 and December 31, 1998 were $0.
Operating Expenses decreased from $816,714 in 1998, to $525,377 in 1999, largely
due to a decrease in Agency Fees, General and Administration Fees and Management
Fees.
During the nine months ended September 30, 2000 VHSN has continued to develop
its web site www.china-emall.com and although it can be used for off-line sales,
no sales have been made as of November 21, 2000. In August, 2000 VHSN and G.C.
Consulting and Investment Corp. decided that it was in VHSN's best interest in
order to conserve cash on hand, to terminate the consulting agreement which
provided for the services of Dr. Gang Chai. It was determined that the services
of Dr. Chai were not required on a full time basis however both parties agreed
that an arrangement would be reached to compensate Dr. Chai for his services
that may be required from time to time by VHSN. Dr. Gang remains a director of
VHSN.
Liquidity and Capital Resources
VHSN achieved no revenues from operations in 1998, 1999 or during the nine
months ended September 30, 2000. During 1998 VHSN received an aggregate of
approximately $336,000 from investors through the sale of common shares made
pursuant to an offering under Rule 504 of Regulation D promulgated under the
Securities Act. During the first four months of 2000 VHSN received an aggregate
of approximately $1,165,000 from investors through the sale of common shares
made pursuant to offerings exempt from registration including the exercise of
outstanding warrants.
Revenues are projected to commence during the current fiscal year ending
December 31, 2000.
Changes in Financial Position
On March 31, 1998 a promissory note payable to Groupmark Canada Limited in the
amount of $500,000 was converted to 5,000,000 restricted common shares of VHSN.
During 1999 VHSN's total assets decreased from $236,964 to $208,306. Total
assets increased to $1,303,238 on September 30, 2000. This increase in total
assets is largely due to net intangible assets of $1,001,103. Intangible assets
of $1,181,250 were acquired on April 12, 2000 through the acquisition of all the
issued and outstanding common shares of China eMall Corporation which was
accounted for as a purchase. The intangible assets acquired included goodwill of
$1,081,250.
22
<PAGE>
During 1999 total liabilities increased from $1,722,516 to $2,169,235 which is
largely due to an increase in a note payable to Groupmark Canada Limited
pursuant to the management services agreement between Groupmark and VHSN. During
the nine months ended September 30, 2000 Groupmark accrued an additional
$220,000 under the management services agreement, converted $865,868 of the
amounts due to it into 2,500,000 common shares of VHSN and received $720,973 in
cash.
The number of issued common shares of VHSN increased from 1,240,721 on December
31, 1997 to 10,429,435 on December 31, 1998 and to 10,929,435 on December 31,
1999. Shareholders' equity decreased from ($1,485,552) to ($1,960,929) during
1999.
The reserve for loss contingencies for the period ended December 31, 1999 is for
potential payroll tax liabilities relating to employees of Video Home Shopping,
Inc., (a Tennessee company that was acquired by VHSN in December, 1996 - see
DESCRIPTION OF BUSINESS - Acquisition of Video Home Shopping, Inc.) and for
other outstanding claims. It is not a general liability reserve.
DESCRIPTION OF PROPERTY
SmartCARD
VHSN does not own any property, however on October 1, 2000 it commenced a five
year lease of approximately 3,000 square feet of office space located at 5170
Dixie Road, Suite 301, Mississauga, Ontario, Canada. The rent for the office
space is CDN$47,927 (approximately $33,000 US) per annum. The premises and rent
are shared with Groupmark Canada Limited. It is VHSN's intention use this
location to house both the smartCARD operation and the China eMall operation at
the same facility.
China eMall
Until operations are moved to 5170 Dixie Road, China eMall Corporation will
maintain its office at 56 Temperance Street, Toronto, Ontario, Canada. China
eMall shares the premises with another tenant on a month to month basis at the
annual rent of CDN$18,000 (approximately US$12,250) or CDN$1,500 (approximately
US$1,020) per month.
23
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Groupmark Canada Limited Management Agreement
Groupmark Canada Limited, a significant shareholder of VHSN is wholly owned by
Elwin D. Cathcart, a director of VHSN. Groupmark provides executive management
personnel and services to VHSN pursuant to an agreement made between Groupmark
and VHSN in April 1997 (the "Management Agreement"). Under the Management
Agreement Groupmark provides management, daily administration functions, and
financial and business advisory services to VHSN. Groupmark was also contracted
to assist in the technological development of smartCARD. Pursuant to the
Management Agreement, charges for these services are not to exceed $56,000 per
month. During 1998 VHSN accrued a debt of $672,000 payable to Groupmark Canada
Limited and during 1999 VHSN accrued a debt of $336,000 payable to Groupmark
Canada Limited for such services. On December 31, 1999 $1,645,868 was
outstanding and during the first 6 months of 2000 an additional $120,000
accrued. During the first 6 months of 2000, VHSN issued 2,500,000 common shares
to Groupmark in settlement of $865,868 and paid Groupmark $192,568 in cash. As
of June 30, 2000 $707,432 was outstanding under the Management Agreement.
Outstanding balances under the Management Agreement accrue without interest
however Groupmark has the option to accept payment by way of VHSN's common stock
at fair market value in lieu of cash.
Gang Chai Consulting Agreement
Until August, 2000, Dr. Gang Chai had been providing services to VHSN through a
consulting agreement made between G.C. Consulting and Investment Corp. (the
"Consultant"), Gang Chai and VHSN (the "Consulting Agreement"). Pursuant to the
Consulting Agreement, VHSN agreed to pay to the Consultant during the term a
monthly fee of CDN $7,833.34 (approximately US$5,330), plus applicable goods and
services tax, payable on the first day of each month for the term of the
Consulting Agreement, the initial term of which is one year. In the end of
August, 2000 the Consulting Agreement was terminated pending re-negotiation by
the parties. Dr. Chai however still serves as a director and officer of VHSN.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
In 1996 the common shares of VHSN began trading on the NASD Over-the-Counter
Bulletin Board market and continued trading under the trading symbol "VHSN"
until, on or about, May 18, 2000 when it continued trading on the Pink Sheets.
24
<PAGE>
Table 4 forth high and low bid prices of VHSN's common shares for 1998 and 1999
as obtained by the National Quotation Bureau, LLC or as otherwise indicated.
Table 4 Closing Bid
--------------------------------------------------------------
Quarter(1) High $ Low $
--------------------------------------------------------------
1998
----
First Quarter 1.03 0.13
Second Quarter 3.25 0.31
Third Quarter 3.44 1.50
Fourth Quarter 2.16 0.44
1999
----
First Quarter 0.88 0.16
Second Quarter 0.59 0.13
Third Quarter 0.27 0.06
Fourth Quarter 0.20 0.12
2000
----
First Quarter(2) 2.00 0.03
Second Quarter(2) 0.80 0.03
Third Quarter (2) 0.36 0.08
--------------------------------------------------------------
(1) Each quarter is based on the calendar year
(2) Prices supplied by VHSN
Holders
As of June 30, 2000 the numbers of registered holders of record of common shares
was 164 and the number of beneficial holders of common shares was over 500.
Dividends
VHSN has not declared any dividends in the last two fiscal years.
25
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
Table 5 provides certain summary information concerning compensation paid to or
accrued by the Chief Executive Officer and the Secretary of VHSN for services
rendered to VHSN during the last three years. No executive officer earned more
than $100,000 in each of the last three years.
<TABLE>
<CAPTION>
Table 5
----------------------- ------- ----------------------------------- -------------------------
Annual Compensation Long Term Compensation
Name Awards
And Other Restricted Securities
Principal Annual Stock Underlying
Position Year Salary Bonus Compensation Awards Options
($) ($) ($) ($) (#)
----------------------- ------- ----------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Elwin D. Cathcart 1997 0 0 0 0 250,000
CEO and President 1998 0 0 0 0 750,000
1999 0 0 (1) 0 0
----------------------- ------- ----------------------------------- --------------------------
David Smelsky 1997 0 0 0 0 250,000
Secretary 1998 0 0 0 0 250,000
1999 0 0 0 0 0
----------------------- ------- ----------------------------------- --------------------------
</TABLE>
(1) Elwin D. Cathcart received 370,000 common shares in lieu of salary for
services valued at $0.13 per common share.
(2) David Smelsky received 185,000 common shares in lieu of salary for
services valued at $0.13 per common share.
During the years ended December 31, 1998 and 1999 VHSN accrued amounts owing to
Groupmark Canada Limited ("Groupmark") of $672,000 and $336,000, respectively,
pursuant to a management services agreement (the "Management Agreement") (See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"). Elwin D. Cathcart and David
Smelsky were both employees of Groupmark during the years ended December 31,
1998 and 1999, and provided services to VHSN under the Management Agreement
(however David Smelsky ceased being an employee of Groupmark in October 1999).
During 1998 approximately CDN$80,000 (or $55,000 US) can be attributed to the
services of Elwin D. Cathcart and approximately CND$40,000 (or $25,000 US) can
be attributed to the services of David Smelsky. During 1999 approximately
CDN$46,000 (or $30,000 US) can be attributed to the services of Elwin D.
Cathcart and approximately CND$23,000 (or $15,000 US) can be attributed to the
services of David Smelsky.
Dr. Gang Chai, a director of VHSN and one of the founders of China eMall
Corporation, was compensated for services provided to VHSN through an agreement
between himself, his consulting company, G.C. Consulting and Investment Corp.
and VHSN (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") for a period
from April, 2000 until August, 2000 when services under his consulting agreement
and payment therefor terminated. The total compensation paid pursuant to Dr.
Chai's consulting agreement, including $6,150.00 for an earlier termination fee,
was $32,800.00. Dr. Chai and VHSN are currently negotiating a new arrangement
for the services provided by Dr. Chai.
26
<PAGE>
OPTIONS GRANTED
<TABLE>
<CAPTION>
Table 6
--------------------- ---------- ---------------- --------------- ------------------ ---------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or Base Expiration Date
Options Employees Price($/Sh)
Name Year Granted(#) In Fiscal Year
--------------------- ---------- ---------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Elwin Cathcart 1999 0 0 N/a N/a
1998 750,000 60% 0.40 Dec.31,2002
1997 250,000 28% 0.35 Dec.31,2001
--------------------- ---------- ---------------- --------------- ------------------ ---------------
David Smelsky 1999 0 0 N/a N/a
1998 250,000 20% 0.40 Dec.31,2002
1997 250,000 28% 0.35 Dec.31,2001
--------------------- ---------- ---------------- --------------- ------------------ ---------------
Thomas Roberts 1999 0 0 N/a N/a
1998 250,000 20% 0.40 Dec.31,2002
1997 250,000 28% 0.35 Dec.31,2001
--------------------- ---------- ---------------- --------------- ------------------ ----------------
</TABLE>
AGGREGATE OPTION GRANTS IN LAST FISCAL YEAR
None of the options granted to officers and directors have been exercised as
shown in Table 7 below. At December 31, 1999 no options were "in-the-money"
which means that the market price of the shares of VHSN was lower than the
exercise price of the options.
<TABLE>
<CAPTION>
Table 7
---------------------- -------------- ------------ --------------------------- ------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at December 31, at December 31, 1999
Acquired on Value 1999
Name Exercise Realized Exercisable/ Exercisable/
(#) Unexercisable ($) Unexercisable ($)
---------------------- -------------- ------------ --------------------------- ------------------------
<S> <C> <C> <C> <C>
Elwin D. Cathcart 0 0 1,000,000/0 0/n/a
---------------------- -------------- ------------ --------------------------- ------------------------
David Smelsky 0 0 500,000/0 0/n/a
---------------------- -------------- ------------ --------------------------- ------------------------
Thomas Roberts 0 0 500,000/0 0/n/a
---------------------- -------------- ------------ --------------------------- ------------------------
</TABLE>
27
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During the last two fiscal years the accountant for VHSN has not resigned,
declined to stand for re-election or been dismissed. However, VHSN was required
to change from its Canadian auditor to a Certified Public Accountant in the
United States in preparation of becoming a reporting company in the United
States.
Exodus Acquisition Corporation, a wholly-owned subsidiary of VHS, changed its
principal accountant from Weinberg & Company, P.A. to Berg & Company in the
current fiscal year in connection with the purchase of all the issued and
outstanding shares of Exodus by VHS on May 6, 2000.
Weinberg & Company was formally notified on September 19, 2000 that Exodus would
no longer require their services as principal accountant. The report of Weinberg
& Company on the financial statements of Exodus as of February 24, 2000
contained no adverse opinion or disclaimer of opinion nor was it modified as to
uncertainty, audit scope, or accounting principles. The decision to change
accountants was recommended by the shareholder of Exodus.
There were no disagreements with the former accountant of Exodus.
FINANCIAL STATEMENTS
Audited financial statements for the year ended December 31, 1999 and 1998 are
filed herewith. Consolidated Balance Sheets as of September 30, 2000,
Consolidated Statements of Operations, Consolidated Statements of Shareholders'
Equity and Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 are also filed herewith.
28
<PAGE>
VHS NETWORK, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1999 and 1998
F-1
<PAGE>
VHS NETWORK, INC.
Consolidated Financial Statements
December 31, 1999 and 1998
C O N T E N T S
---------------
Independent Auditor's Report F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-20
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
VHS NETWORK, Inc.
We have audited the accompanying consolidated balance sheets of VHS NETWORK,
Inc., a Florida Corporation, as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VHS Network, Inc.,
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 2 and Note 7, the Company in 1998 recorded inventory
acquired through the issuance of common stock at a different amount than the
fair market value of the common stock. The Company has restated these financial
statements to record the inventory acquired based on the fair market of the
common stock. Additionally, the Company recorded compensation expense for stock
granted to the executive officers in 1999.
By: /s/ Berg & Company LLP
--------------------------
BERG & COMPANY LLP
March 29, 2000, except for Note 2 and Note 7 as
to which the date is October 9,2000.
F-3
<PAGE>
<TABLE>
<CAPTION>
VHS NETWORK, INC.
Consolidated Balance Sheets
As of December 31, 1999 and 1998
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 533 $ 18,191
Receivables - 11,000
Inventory 139,999 139,999
----------------- -----------------
Total current assets 140,532 169,190
----------------- -----------------
Prepaids and deposits 67,774 67,774
----------------- -----------------
Total assets $ 208,306 $ 236,964
================= =================
LIABILITIES
Accounts payable $ 64,867 $ 40,842
Salaries and wages payable to officers 71,500 -
Accrued expenses 37,000 -
----------------- -----------------
Total current liabilities 173,367 40,842
----------------- -----------------
Notes payable - -
Notes payable, related party 1,645,868 1,331,674
Reserve for loss contingencies 350,000 350,000
----------------- -----------------
Total long-term liabilities 1,995,868 1,681,674
----------------- -----------------
Total liabilities 2,169,235 1,722,516
----------------- -----------------
SHAREHOLDERS' EQUITY
Common stock: 100,000,000 shares authorized;
10,929,435 and 10,429,435 issued and outstanding,
respectively 10,929 10,429
Preferred stock: 25,000,000 shares authorized;
none issued or outstanding - -
Additional paid-in-capital 1,231,170 1,181,670
Accumulated deficit (3,203,028) (2,677,651)
----------------- -----------------
Total shareholders' equity (1,960,929) (1,485,552)
----------------- -----------------
Total liabilities and shareholders' equity $ 208,306 $ 236,964
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Operations
for the years ended December 31, 1999 and 1998
1999 1998
----------------- ----------------
Income:
Sales $ - $ -
----------------- ----------------
Operating Expenses:
Agency fees 9,190 21,634
Salaries and wages 71,500 -
Consulting fees 52,833 53,253
General and administrative 686 50,413
Management fees 336,000 672,000
Professional fees 18,168 16,647
Other - 2,767
Non-recurring expense 37,000 -
----------------- ----------------
Total operating expenses 525,377 816,714
----------------- ----------------
Other (Income) and Expenses:
Interest (income) and expense - 328
Other (income) and expense, net - (596)
----------------- ----------------
Total other (income) and expense - (268)
----------------- ----------------
Net loss before taxes 525,377 816,446
----------------- ----------------
Income taxes - -
----------------- ----------------
Net loss $ 525,377 $ 816,446
================= ================
Net loss per common share - Basic $ 0.050 $ 0.122
================= ================
Weighted average number of
common shares - Basic 10,432,175 6,716,582
================= ================
Net loss per common share - Diluted $ 0.048 $ 0.112
================= ================
Weighted average number of
common shares - Diluted 10,864,380 7,303,850
================= ================
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
VHS NETWORK, INC.
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999 and 1998
(Split Table)
Common Preferred
Stock Stock
--------------------------------- ------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance December 31, 1997 1,240,721 $ 1,241 - $ -
---------------- ---------------- --------------- -------------
Sale of stock 2,788,722 2,789 - -
Conversion of debt 5,000,000 5,000 - -
Acquisition of inventory 1,399,992 1,399 - -
Net loss - - - -
---------------- ---------------- --------------- -------------
Balance December 31, 1998 10,429,435 10,429 - -
---------------- ---------------- --------------- -------------
Common stock issued for services 500,000 500 - -
Net loss - - - -
---------------- ---------------- --------------- -------------
Balance December 31, 1999 10,929,435 $ 10,929 - $ -
================ ================ =============== =============
</TABLE>
<TABLE>
<CAPTION>
Additional Accumulated
paid-in-capital Deficit Total
------------------ ---------------- ----------------
<S> <C> <C> <C>
Balance December 31, 1997 $ 214,859 $ (1,861,205) $ (1,645,105)
---------------- ---------------- ----------------
Sale of stock 333,211 - 336,000
Conversion of debt 495,000 - 500,000
Acquisition of inventory 138,600 - 139,999
Net loss - (816,446) (816,446)
---------------- ---------------- ----------------
Balance December 31, 1998 1,181,670 (2,677,651) (1,485,552)
---------------- ---------------- ----------------
Common stock issued for services 49,500 - 50,000
Net loss - (525,377) (525,377)
---------------- ---------------- ----------------
Balance December 31, 1999 $ 1,231,170 $ (3,203,028) $ (1,960,929)
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Cash Flows
for the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
<S> <C> <C>
Net income (loss) $ (525,377) $ (816,446)
Issuance of common stock for services 50,000 -
Depreciation and amortization - -
--------------- -------------
Net use of cash from operations $ (475,377) $ (816,446)
--------------- -------------
Cash flow from operating activities:
Changes in assets and liabilities
Receivables $ 11,000 $ (11,000)
Prepaids and deposits - (67,774)
Accounts payable 24,025 33,668
Salaries and wages payable - officers 71,500 -
Accrued expenses 37,000 -
--------------- -------------
Cash flow generated by (used in)
operating activities $ (331,852) $ (861,552)
--------------- -------------
Cash flow from investing activities: $ - $ -
Net cash generated by (used in)
investing activities $ - $ -
--------------- -------------
Cash flow from financing activities:
Borrowings under notes payable $ 314,194 $ 43,685
Notes payable, related party -
converted to stock - 500,000
Offering costs - -
Proceeds from sale of stock - 336,000
--------------- -------------
Net cash generated by (used in)
financing activities $ 314,194 $ 879,685
--------------- -------------
(Decrease) Increase in cash and
cash equivalents (17,658) 18,133
Balance at beginning of year 18,191 58
--------------- -------------
Balance at end of year $ 533 $ 18,191
=============== =============
Supplementary disclosure:
Cash paid for interest $ - $ -
--------------- -------------
Cash paid for taxes $ - $ -
--------------- -------------
Inventory acquired for common stock $ - $ 139,999
--------------- -------------
Conversion of notes payable into common stock $ - $ 500,000
--------------- -------------
Common stock issued for services $ 50,000 $ -
--------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
1. NATURE OF OPERATIONS
Company History
---------------
VHS Network, Inc. (the "Company") was incorporated in the State of
Florida on December 18, 1995 as Ronden Vending Corp. On December 24,
1996, the Company incorporated a wholly owned subsidiary called Ronden
Acquisition, Inc. a Florida corporation. Ronden Acquisition, Inc. then
merged with Video Home Shopping, Inc. (a Tennessee corporation), and
Ronden Acquisition, Inc. was the surviving Florida Corporation. In
1996, Video Home Shopping, Inc. was a network marketing and
distribution company which offered a wide range of products and
services to consumers through the medium of video tape, however, after
the merger the Company decided not to continue with the network
marketing and distribution operations of Video Home Shopping, Inc. of
Tennessee.
On January 9, 1997, articles of merger were filed for the Company as
the surviving corporation of a merger between the Company and its
wholly owned subsidiary Ronden Acquisitions, Inc. This step completed
the forward triangular merger between Video Home Shopping, Inc., Ronden
Acquisition, Inc. and the Company.
On January 9, 1997, articles of amendment were filed to change the name
of the Company from Ronden Vending Corp. to VHS Network, Inc. On April
9, 1997, the Company incorporated VHS Acquisition, Inc. as a wholly
owned subsidiary.
In April 1997, the Company was restructured by way of a reverse
take-over involving its wholly owned subsidiary, VHS Acquisition, Inc.
a Florida company, and VHS Network Inc., a Manitoba and Canadian
controlled private corporation. Pursuant to the reverse take-over, the
sole shareholder of VHS Network Inc., Groupmark Canada Limited,
received 400,000 shares of the Company's common stock and a secured
promissory note for US$500,000 and became the controlling shareholder
of the Company. In 1998, the promissory note for $500,000 was converted
into 5,000,000 common shares.
On April 12, 2000, the Company acquired all the outstanding common
shares of China eMall Corporation, an Ontario private company. This
represents a 100% voting interest in China eMall Corporation.
F-8
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
1. NATURE OF OPERATIONS (continued)
Operations
----------
During 1999, the Company has been repositioning itself to identify
technologies and market opportunities in the United States, Canada and
abroad in Internet and electronic commerce interactive media, and
SmartCARD loyalty marketing. The Company will operate and/or develop
two lines of business as follows:
China eMall Corporation ("China eMall"): Through its acquired
subsidiary, China eMall Corporation, an Ontario, Canada corporation,
the Company provides Internet marketing and information services to
facilitate trade between Chinese and western businesses. The Company's
primary focus will be to establish an on-line presence to facilitate
the export of Chinese products. Through its multi-functional portal,
Chinese suppliers can post their products and services in a format that
is easy for searching, quoting and tracking, and that gives a western
buyer access to multiple suppliers for the best quality and price, and
direct communication. Realizing the difference in business culture and
financial systems, China eMall will allocate substantial amount of
resources in assisting in the communications, export/import processing,
financial transaction and product services. China eMall's business will
make use of Internet technology to speed up the export process and
broaden the sales channels for Chinese goods and services, and more
importantly, bring customers into direct contact with Chinese producers
who can constantly upgrade their products to meet customers' needs.
China eMall has an agreement with Wangfujing Department Store Ltd., a
large Chinese retailer, as its prime product supplier.
SmartCARD: The Company is developing computer chip-based plastic access
cards that utilize proprietary SmartCARD technology, which is licensed
from Groupmark Canada Limited, a related party. This technology enables
the cards to be used for identification purposes and as debit or charge
cards. The Company intends to focus its marketing efforts on companies
that wish to distribute these cards to their customers as a reward for
their loyalty. Groupmark Canada Limited owns the registered trademark
"SmartCARD" in Canada and has a pending application in the United
States. Groupmark Canada has granted the Company a license to use the
trademark "SmartCARD." Pursuant to the terms of the license agreement,
the Company will pay to Groupmark a royalty of 5% of net sales of
products using the SmartCARD trademark and technology.
F-9
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
following is a summary of the significant accounting policies followed
in the preparation of these consolidated financial statements.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and all of its subsidiary companies. Intercompany accounts and
transactions have been eliminated on consolidation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of cash on hand and cash deposited
with financial institutions, including money market accounts, and
commercial paper purchased with an original maturity of three months or
less.
Concentration of Cash
---------------------
The Company at times maintains cash balances in accounts that are not
fully federally insured. Uninsured balances as of December 31, 1999
were $533.
Inventories
-----------
Inventories are stated at the lower of cost (first in, first out
method) or market.
Property and Equipment
----------------------
Property and equipment are stated at cost or, in the case of leased
assets under capital leases, at the present value of future lease
payments at inception of the lease. Major improvements that materially
extend the useful life of property are capitalized. Depreciation is
calculated on a straight-line basis over the estimated useful lives of
the various assets, which range from three to seven years. Leasehold
improvements and leased assets under capital leases are amortized over
the life of the asset or the period of the respective lease using the
straight-line method, whichever is the shortest. Expenditures for
repairs and maintenance are charged to expense as incurred.
F-10
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based Compensation
------------------------
The Company accounts for its stock-based compensation plan based on
Accounting Principles Board ("APB") Opinion No. 25. In October 1995,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has determined
that it will not change to the fair value method and will continue to
use APB Opinion No. 25 for measurement and recognition of any expense
related to employee stock based transactions.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Income taxes are provided for the tax
effects of transactions reported in the consolidated financial
statements and consist of deferred taxes related to differences between
the basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for operating losses that
are available to offset future taxable income.
Foreign Currency Translation
----------------------------
Transactions are translated into the functional currency at the
exchange rates in effect at the time the transactions occur. Exchange
gains and losses arising on translation are included in the operating
results for the year.
Revenue
-------
Sales are recorded for products upon shipment of product to customers
and transfer of title under standard commercial terms.
F-11
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income
--------------------
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and unrealized gains (losses) on available for sale marketable
securities and is presented in the consolidated statements of
shareholders' equity and comprehensive income. SFAS No. 130 requires
only additional disclosures in the consolidated financial statements
and does not affect the Company's financial position or results of
operations. The Company does not have elements of comprehensive income
for the years ended December 31, 1999 and 1998.
Income (loss) per common share
------------------------------
Income (loss) per common share is computed on the weighted average
number of common or common and common equivalent shares outstanding
during each year. Basic Earnings-per-Share ("EPS") is computed as net
income (loss) applicable to common stockholders' divided by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, and other
convertible securities when the effect would be dilutive.
Long-lived assets
-----------------
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, the Company reviews the carrying value of its long-lived
assets and identifiable intangibles for possible impairment whenever
events or changes in circumstances indicate the carrying amount of
assets to be held and used may not be recoverable.
F-12
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles necessarily requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could significantly differ from those estimates.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires recognition
of all derivative financial instruments as either assets or liabilities
in consolidated balance sheets at fair value and determines the method
(s) of gain/loss recognition. The FASB issued SFAS No. 137, "Deferral
of the Effective Date of FASB Statement No. 133" in June 1999 to defer
the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company will adopt SFAS No. 133 in 2000 and we are
currently assessing the effect that it may have on our consolidated
financial statements.
Restatement of Financial Results
--------------------------------
The financial information reported herein for the years ended December
31, 1999 and 1998 have been restated from amounts previously reported
in order to reflect a modification of the amount recorded for the
acquisition of inventory in exchange for shares of the Company's common
stock and to reflect the grant of common shares to two executive
officers of the company in lieu of of cash payments for salaries.
Previously, the Company recorded the value of the inventory as being
higher than the fair market value of the shares of common stock
exchanged for the inventory. The Company had not recorded the
compensation expense for the shares of common stock granted to
executive officers in lieu of cash compensation. The shares were issued
to these executive officers subsequent to December 31, 1999.
The net effect of the restatement was to to increase the net loss by
$71,500 for the year ended December 31, 1999 and reduce current assets
by $419,998.
F-13
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
3. INVENTORIES
On April 29, 1998, the Company acquired approximately 32,000 sets of
printed art reproductions. Each set consists of four full-color prints
from "The Andover Series" by artist Jim Perleberg. Each image has a
title narrative printed in the margin and is re-signed, in the plate,
by the artist.The management of the Company have evaluated the market
value of the prints and determined that the market value of the prints
is not below their acquisition cost. The prints are by a noted artist,
and the original Andover Series S/N Limited Edition lithographs were
fully sold.
The Company acquired these sets of prints in exchange for 1,399,992
shares of its common stock valued at $139,999 (see note 2). The Company
will be offering these prints for sale through its own web site and
other Internet web sites.
4. INCOME TAXES
No provision for federal and state taxes has been recorded for the
years ended December 31, 1999 and 1998, since the Company incurred net
operating losses for these years.
The provision for income taxes does not differ from the amounts
recorded for financial versus tax purposes.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
components of net deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
Federal State
----------------- ------------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 1,089,029 $ 176,167
Non-deductible reserve (119,000) (19,250)
Accrued expenses (24,310) (3,932)
Valuation allowance (945,719) (152,985)
----------------- ------------------
Net deferred tax asset - -
----------------- ------------------
Deferred income tax liabilities: - -
----------------- ------------------
Net assets $ - $ -
================= ==================
</TABLE>
F-14
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
4. INCOME TAXES (continued)
Due to the uncertainty surrounding the realization of deferred tax
assets, the Company has recorded a valuation allowance against its net
deferred tax asset. The Company has loss carryforwards of approximately
$945,719 from continuing operations, which may be used to offset future
United States income taxes and which begin to expire in 2015.
5. STOCKHOLDERS' EQUITY
Common Stock
------------
Starting in April 1997, the Company, under its current management,
commenced a private placement of its common shares under Rule 504 of
Regulation D promulgated under the Securities Act of 1933, for a
maximum aggregate offering of $890,000. The Company raised proceeds of
$416,492 under this offering of which $336,000 was raised in 1998. This
offering concluded in 1998.
On March 31, 1998, the promissory note payable to Groupmark Canada
Limited for US$500,000 was converted to 5,000,000 restricted common
shares of the Company. Mr. Elwin Cathcart, CEO of the Company, is the
sole shareholder in Groupmark Canada Limited.
In May 1998, 1,399,992 restricted common shares were issued in a
transaction for the purchase of inventory for resale. The fair market
value of the shares of common stock exchanged for the inventory was
$139,999.
6. STOCK OPTIONS
In 1998, the Company granted stock options to two executive officers
and a member of the board. The stock options were non-qualified stock
options. The options were granted at the fair market value of the stock
as determined by the Board of Directors. Stock options were granted to
purchase a total of 1,250,000 common shares at $0.40 per share. The
options are immediately vested and expire on December 31, 2002.
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plan other than for options issued to
outside third parties. If the Company
F-15
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
6. STOCK OPTIONS (continued)
had elected to recognize compensation expense based upon the fair value
at the grant date for awards under this plan consistent with the
methodology prescribed by SFAS No. 123, the Company's net loss and loss
per share would be reduced to the pro forma amounts indicated below for
the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Net loss
As reported $ (525,377) $ (816,714)
Pro forma $ (525,377) $ (1,212,964)
Basic and diluted loss per common share
Basic:
As reported $ (0.05) $ (0.12)
Pro forma $ (0.05) $ (0.18)
Diluted:
As reported $ (0.048) $ (0.11)
Pro forma $ (0.048) $ (0.17)
</TABLE>
Options are granted at prices are equal to the current fair value of
the Company's common stock at the date of grant. The vesting period is
usually four years or related to the length of the consulting contract
period.
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1999: dividend yield of 0%; expected
volatility of 120%; risk-free interest rate of 6.0%, and expected life
of 4 years; 1998: dividend yield of 0%; expected volatility of 120%;
risk-free interest rate of 5.3%, and expected life of 4 years; 1997:
dividend yield of 0%; expected volatility of 120%; risk-free interest
rate of 6.0%, and expected life of 4 years.
F-16
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
6. STOCK OPTIONS (continued)
A summary of the status of the Company's stock option plan as of
December 31, 1999 and 1998 and changes during the years ended on those
dates is presented below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1999 price 1998 price
---- ----- ---- -----
<S> <C> <C> <C> <C>
Balance at beginning of year 2,000,000 $0.36 750,000 $ 0.30
Granted - 1,250,000 0.40
Exercised - -
------------ ------------
Forfeited/Cancelled - -
Outstanding at year end 2,000,000 $0.36 2,000,000 $ 0.36
Options exercisable at year end 2,000,000 $0.36 2,000,000 $ 0.36
Weighted average fair value of
options granted during the year $0.00 $0.31
------------ ------------
</TABLE>
The remaining contractual life for options granted to purchase 750,000
shares of common stock is 24 months. The remaining contractual life for
options granted to purchase 1,250,000 shares of common stock is 36
months.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
F-17
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
7. RELATED PARTY TRANSACTIONS
Groupmark Canada Limited
------------------------
In 1997, the Company entered into a management service agreement with
Groupmark Canada Limited ("Groupmark"), of which the Chairman and Chief
Executive Officer of the Company is the sole shareholder. Under this
agreement, Groupmark provides the Company all management, daily
administrative functions, financial and business advisory services.
Groupmark was also contracted to assist in the technological
development of the "SmartCARD." Contractually, charges for these
services are not to exceed $56,000 per month.
Amounts due Groupmark pursuant to this management service agreement as
of December 31, 1999 and 1998 are $1,645,868 and $1,331,674,
respectively. Groupmark has the option to accept payment by way of the
Company's common stock at fair market value in lieu of cash.
Transactions with Corporate Officers and Directors
--------------------------------------------------
In 1998, the Company granted to the Chairman and Chief Executive
Officer of the Company stock options to purchase 750,000 common shares
at $0.40 per share. The Company granted to the Chief Financial Officer
of the Company stock options to purchase 250,000 common shares at $0.40
per share. The Company granted to a member of the Board of Directors of
the Company stock options to purchase 250,000 common shares at $0.40
per share.
On October 13, 1999 the Board of Directors approved issuance of 370,000
and 185,000 shares of the Company's common stock to the Chief Executive
Officer and Chief Financial Officer, respectively. The grants of common
stock were made in lieu of cash compensation. The total market value of
the common stock on the date of grant was $71,500. The shares were
issued to these two individuals in July 2000.
8. COMMITMENTS AND CONTINGENCIES
Legal
-----
The Company is not currently aware of any legal proceedings or claims
that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or
results of operations.
F-18
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
8. COMMITMENTS AND CONTINGENCIES (continued)
Video Home Shopping, Inc., a Tennessee Corporation
--------------------------------------------------
In December 1996, the Company merged Video Home Shopping, Inc., a
Tennessee corporation. Subsequent to the merger, the new management of
the Company decided not to continue with the business operations of
Video Home Shopping, Inc. In consideration of the closure of Video Home
Shopping, Inc., the Company continues to maintain a reserve for
potential loss contingencies from these operations of $350,000.
This loss reserve is primarily for payroll tax liabilities incurred by
Video Home Shopping, Inc. before its merger VHS Network, Inc. The
Company may be contingently liable for amounts withheld by Video Home
Shopping, Inc. from employees' wages for income taxes, which were not
remunerated to the Internal Revenue Service.
In December 1999, the company entered into a stipulated judgment in the
amount of $37,000 for a liability on a promissory note issued by Video
Home Shopping, Inc. The amount is reflected in the statement of
operations as a non-recurring expense.
Going Concern Uncertainties
---------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has experienced recurring operating losses and negative cash flows from
operations. The Company's continued existence is dependent upon its
ability to increase operating revenues and/or raise additional equity
financing.
In view of these matters, management believes that actions presently
being taken to expand the Company's operations and to continue its
web-site development activity provide the opportunity for the Company
to return to profitability. The continued focus on strategic
technological investments will improve the Company's cash flow,
profitability, and ability to raise additional capital so that it can
meet its strategic objectives.
Management raised additional capital subsequent to the year ended
December 31, 1999, and is currently in the process of negotiating
additional equity financing with potential investors. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
F-19
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
December 31, 1999
9. SUBSEQUENT EVENTS
Acquisition of China eMall Corporation
--------------------------------------
On April 12, 2000, the Company completed the acquisition of all
outstanding common shares of China eMall Corporation, ("eMall") an
e-commerce company, through the issuance of 2,100,000 shares of the
Company's common stock, which had a market value of $1,181,250. eMall
has Preferred Stock outstanding that is convertible into 4,015,000
shares of the Company's common stock. The Company has a 100% interest
in the voting stock of China eMall as a result of this transaction. The
Preferred Stock of eMall is non-voting, and it is convertible into the
Company's common stock at the discretion of the holders of eMall
Preferred Stock. The eMall Preferred Stock can be redeemed by the
Company at the earlier of: (a) three years from the date on which a
registration statement for the Common shares of the Company is filed
with the Securities and Exchange Commission in the US; or (b) five
years from the date of issue, (April 12, 2000). The transaction will be
accounted for under the purchase method in accordance with APB No. 16.
Common Stock Transactions
-------------------------
On April 12, 2000, the Company sold 550,000 shares of its common stock
for $110,000, which included warrants to purchase 1,225,000 shares of
its common stock at exercise prices ranging from $0.35 to $0.95. All
warrants expire on or before 180 days from the date of issuance.
In December 1999, the Company commenced a private placement of its
common shares under Rule 504 of Regulation D promulgated under the
Securities Act of 1933 and section 203 (t) of the Pennsylvania
Securities Act of 1972. Through April of 2000, the Company sold
2,583,333 shares for $1,000,000, completing the full offering.
Acquisition of Exodus Acquisition Corporation
---------------------------------------------
In May 2000, the Company has agreed to merge with Exodus Acquisition
Corporation, a California corporation, and a fully reporting company
under regulation 12(g) of the Securities Exchange Act of 1934. Exodus
has no material assets or liabilities. The Company will exchange
500,000 shares of the Company's common stock for all the outstanding
shares of Exodus Acquisition Corporation. To conclude this transaction,
the Company has incurred $90,000 in acquisition related expenses.
F-20
<PAGE>
VHS NETWORK, INC.
Consolidated Financial Statements
September 30, 2000
C O N T E N T S
---------------
Balance Sheets F2-1
Statements of Operations F2-2 - F2-3
Statements of Shareholders' Equity F2-4
Statements of Cash Flows F2-5
Notes to Financial Statements F2-6 - F2-16
<PAGE>
VHS NETWORK, INC.
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999
September 30, December 31,
2000 1999
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash $ 65,124 $ 533
Inventory 139,999 139,999
----------- -----------
Total current assets 205,123 140,532
----------- -----------
Property and Equipment
Furniture and Equipment 18,940 --
Accumulated Depreciation (1,419) --
----------- -----------
17,521
Intangible assets, net 1,001,103 --
Other Assets
Other receivables 11,717 --
Prepaids and deposits 67,774 67,774
----------- -----------
Total assets $ 1,303,238 $ 208,306
=========== ===========
LIABILITIES
Accounts payable $ 51,916 $ 64,867
Salaries and wages payable - officers -- 71,500
Accrued expenses -- 37,000
----------- -----------
Total current liabilities 51,916 173,367
----------- -----------
Notes payable, related party 257,027 1,645,868
Reserve for loss contingencies 350,000 350,000
----------- -----------
607,027 1,995,868
----------- -----------
Total liabilities 658,943 2,169,235
----------- -----------
SHAREHOLDERS' EQUITY
Common stock: 100,000,000
shares authorized;
19,535,268 and 10,929,435
issued and outstanding,
respectively 19,534 10,929
Preferred stock: 25,000,000
shares authorized;
none issued or outstanding -- --
Additional paid-in-capital 4,678,933 1,231,170
Accumulated deficit (4,054,172) (3,203,028)
----------- -----------
Total shareholders' equity 644,295 (1,960,929)
----------- -----------
Total liabilities and shareholders' equity $ 1,303,238 $ 208,306
=========== ===========
The accompanying notes are an integral part of these financial statements.
F2-1
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999, and
the year ended December 31, 1999
Three months Nine months
ended ended
September 30, September 30,
2000 2000
------------ ------------
(unaudited) (unaudited)
Income:
Sales $ -- $ --
------------ ------------
Operating Expenses:
Agency fees 2,861 45,390
Consulting fees 12,815 36,501
General and administrative 725 32,654
Management fees 75,000 220,000
Professional fees 10,876 87,577
Office expense-China 10,380 39,017
Amortization of intangible assets 98,439 180,147
Depreciation and amortization expense 473 1,419
Non-recurring expense -- 216,515
------------ ------------
Total operating expenses 211,569 859,220
------------ ------------
Other (Income) and Expenses:
Currency exchange (gain)/loss 1,090 935
Interest (income) (7,724) (9,516)
Interest expense 287 505
------------ ------------
Total other (income) and expense (6,347) (8,076)
------------ ------------
Net loss before taxes 205,222 851,144
------------ ------------
Income taxes -- --
------------ ------------
Net loss $ 205,222 $ 851,144
============ ============
Net loss per common share - Basic $ 0.011 $ 0.052
============ ============
Weighted average number of
common shares - Basic 19,438,747 16,526,242
============ ============
Net loss per common share - Diluted $ 0.009 $ 0.043
============ ============
Weighted average number of
common shares - Diluted 23,550,268 19,693,755
============ ============
The accompanying notes are an integral part of these financial statements.
F2-2
<PAGE>
<TABLE>
<CAPTION>
VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months and nine months ended September 30, 2000
and 1999, and the year ended December 31, 1999
(continued)
Three months Nine months
ended ended Year ended
September 30, September 30, December 31,
1999 1999 1999
----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Income:
Sales $ -- $ -- $ --
----------- ----------- -----------
Operating Expenses:
Agency fees 5,250 9,190 9,190
Salaries and wages payable - officers -- -- 71,500
Consulting fees 2,418 4,505 52,833
General and administrative 159 624 686
Management fees -- 336,000 336,000
Professional fees 18,168 18,168 18,168
Office expense-China -- -- --
Depreciation and amortization expense -- -- --
Non-recurring expense -- -- 37,000
----------- ----------- -----------
Total operating expenses 25,995 368,487 525,377
----------- ----------- -----------
Other (Income) and Expenses:
Currency exchange (gain)/loss -- -- --
Interest (income) -- -- --
Interest expense -- -- --
----------- ----------- -----------
Total other (income) and expense -- -- --
----------- ----------- -----------
Net loss before taxes 25,995 368,487 525,377
----------- ----------- -----------
Income taxes -- -- --
----------- ----------- -----------
Net loss $ 25,995 $ 368,487 $ 525,377
=========== =========== ===========
Net loss per common share - Basic $ 0.002 $ 0.035 $ 0.050
=========== =========== ===========
Weighted average number of
common shares - Basic 10,429,435 10,429,435 10,432,175
=========== =========== ===========
Net loss per common share - Diluted $ 0.002 $ 0.034 $ 0.048
=========== =========== ===========
Weighted average number of
common shares - Diluted 10,984,435 10,885,357 10,864,380
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F2-3
<PAGE>
<TABLE>
<CAPTION>
VHS NETWORK, INC.
Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 2000 (unaudited)
and the year ended December 31, 1999
Common Preferred Additional Accumulated
Stock Stock paid-in-capital Deficit Total
-------------------------- ------------------- ----------- ----------- -----------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 10,429,435 $ 10,429 -- $ -- $ 1,181,670 $(2,677,651) $(1,485,552)
----------- ----------- -- -------- ----------- ----------- -----------
Common stock issued
for services 500,000 500 -- -- 49,500 -- 50,000
Net loss for the period -- -- -- -- -- (525,377) (525,377)
----------- ----------- -- -------- ----------- ----------- -----------
Balance December 31, 1999 10,929,435 10,929 -- -- 1,231,170 (3,203,028) (1,960,929)
----------- ----------- -- -------- ----------- ----------- -----------
Sale of common stock 2,083,333 2,083 -- -- 947,917 -- 950,000
Conversion of note payables 2,500,000 2,500 -- -- 863,368 -- 865,868
Common stock issued
for services 7,500 7 -- -- 743 -- 750
Net loss for the period -- -- -- -- -- (103,727) (103,727)
----------- ----------- -- -------- ----------- ----------- -----------
Balance March 31, 2000 15,520,268 15,519 -- -- 3,043,198 (3,306,755) (248,038)
----------- ----------- -- -------- ----------- ----------- -----------
Sale of common stock 550,000 550 -- -- 109,450 -- 110,000
Acquisition of China
e-mall Corp 2,100,000 2,100 -- -- 1,179,150 -- 1,181,250
Acquisition of
Exodus Acquisition 500,000 500 -- -- 124,500 -- 125,000
Conversion of debt
into common stock 10,000 10 -- -- 21,990 -- 22,000
Common stock issued
for services 50,000 50 -- -- 24,950 -- 25,000
Exercise of warrants 250,000 250 -- -- 104,750 -- 105,000
Net loss for the period -- -- -- -- -- (542,195) (542,195)
----------- ----------- -- -------- ----------- ----------- -----------
Balance June 30, 2000 18,980,268 18,979 -- -- 4,607,988 (3,848,950) 778,017
----------- ----------- -- -------- ----------- ----------- -----------
Common stock issued
for compensation 555,000 555 -- -- 70,945 -- 71,500
Net loss for the period -- -- -- -- -- (205,222) (205,222)
----------- ----------- -- -------- ----------- ----------- -----------
Balance September 30, 2000 19,535,268 $ 19,534 -- $ -- $ 4,678,933 $(4,054,172) $ 644,295
=========== =========== == ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F2-4
VHS NETWORK, INC.
Consolidated Statements of Cash Flows
for the six months ended September 30, 2000 and 1999,
and the year ended December 31, 1999
<TABLE>
<CAPTION>
Nine months Nine months
ended ended Year ended
September 30, September 30, December 31,
2000 1999 1999
-------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net income (loss) $ (851,144) $ (368,487) $ (525,377)
Common stock issued for services 25,750 -- 50,000
Acquisition of Exodus Corporation 125,000 -- --
Amortization of intangible assets 180,147 -- --
Depreciation and amortization 1,419 -- --
----------- ----------- -----------
(518,828) (368,487) (475,377)
Cash flow from operating activities:
Changes in assets and liabilities
Other receivables $ (11,717) 11,000 $ 11,000
Accounts payable (12,951) 25,243 24,025
Salaries and wages payable - officers -- -- 71,500
Accrued expenses (37,000) -- 37,000
----------- ----------- -----------
Cash flow generated by (used in)
operating activities (580,496) $ (332,244) $ (331,852)
----------- ----------- -----------
Cash flow from investing activities:
Purchase of furniture and equipment $ (18,940) $ -- $ --
----------- ----------- -----------
Net cash generated by (used in)
investing activities(18,940) $ -- $ --
----------- ----------- -----------
Cash flow from financing activities:
Borrowings under notes
payable - related party $ 220,000 314,194 $ 314,194
Payments on notes
payable -related party (720,973) -- --
Proceeds from exercise of warrants 105,000 -- --
Proceeds from sale of common stock 1,060,000 -- --
----------- ----------- -----------
Net cash generated by (used in)
financing activities 664,027 $ 314,194 $ 314,194
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 64,591 (18,050) (17,658)
Balance at beginning of period 533 18,191 18,191
----------- ----------- -----------
Balance at end of period $ 65,124 $ 141 $ 533
=========== =========== ===========
Supplementary disclosure:
Cash paid for interest $ 505 $ -- $ --
----------- ----------- -----------
Cash paid for taxes $ -- $ -- $ --
----------- ----------- -----------
Conversion of payables into common stock $ 93,500 $ -- $ --
----------- ----------- -----------
Conversion of notes payable - related
party into common stock $ 865,868 $ -- $ --
----------- ----------- -----------
Common stock issued for acquisitions $ 1,306,250 $ -- $ --
----------- ----------- -----------
Common stock issued for services $ 25,750 $ -- $ 50,000
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F2-5
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
1. NATURE OF OPERATIONS
Company History
---------------
VHS Network, Inc. (the "Company") was incorporated in the State of
Florida on December 18, 1995 as Ronden Vending Corp. On December 24,
1996, the Company incorporated a wholly owned subsidiary called Ronden
Acquisition, Inc. a Florida corporation. Ronden Acquisition, Inc. then
merged with Video Home Shopping, Inc. (a Tennessee corporation), and
Ronden Acquisition, Inc. was the surviving Florida Corporation. In
1996, Video Home Shopping, Inc. was a network marketing and
distribution company which offered a wide range of products and
services to consumers through the medium of video tape, however, after
the merger the Company decided not to continue with the network
marketing and distribution operations of Video Home Shopping, Inc. of
Tennessee.
On January 9, 1997, articles of merger were filed for the Company as
the surviving corporation of a merger between the Company and its
wholly owned subsidiary Ronden Acquisitions, Inc. This step completed
the forward triangular merger between Video Home Shopping, Inc., Ronden
Acquisition, Inc. and the Company.
On January 9, 1997, articles of amendment were filed to change the name
of the Company from Ronden Vending Corp. to VHS Network, Inc. On April
9, 1997, the Company incorporated VHS Acquisition, Inc. as a wholly
owned subsidiary.
In April 1997, the Company was restructured by way of a reverse
take-over involving its wholly owned subsidiary, VHS Acquisition, Inc.
a Florida company, and VHS Network Inc., a Manitoba and Canadian
controlled private corporation. Pursuant to the reverse take-over, the
sole shareholder of VHS Network Inc., Groupmark Canada Limited,
received 400,000 shares of the Company's common stock and a secured
promissory note for US$500,000 and became the controlling shareholder
of the Company. In 1998, the promissory note for $500,000 was converted
into 5,000,000 common shares.
On April 12, 2000, the Company acquired all the outstanding common
shares of China eMall Corporation, an Ontario private company. This
represents a 100% interest in the voting stock of China eMall
Corporation.
F2-6
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
1. NATURE OF OPERATIONS (continued)
Operations
----------
During 1999, the Company has been repositioning itself to identify
technologies and market opportunities in the United States, Canada and
abroad in Internet and electronic commerce interactive media, and
SmartCARD loyalty marketing. The Company will operate and/or develop
two lines of business as follows:
China eMall Corporation ("China eMall"): Through its acquired
subsidiary, China eMall Corporation, an Ontario, Canada corporation,
the Company provides Internet marketing and information services to
facilitate trade between Chinese and western businesses. The Company's
primary focus will be to establish an on-line presence to facilitate
the export of Chinese products. Through its multi-functional portal,
Chinese suppliers can post their products and services in a format that
is easy for searching, quoting and tracking, and that gives a western
buyer access to multiple suppliers for the best quality and price, and
direct communication. Realizing the difference in business culture and
financial systems, China eMall will allocate substantial amount of
resources in assisting in the communications, export/import processing,
financial transaction and product services. China eMall's business will
make use of Internet technology to speed up the export process and
broaden the sales channels for Chinese goods and services, and more
importantly, bring customers into direct contact with Chinese producers
who can constantly upgrade their products to meet customers' needs.
China eMall has an agreement with Wangfujing Department Store Ltd., a
large Chinese retailer, as its prime product supplier.
SmartCARD: The Company is developing computer chip-based plastic access
cards that utilize proprietary SmartCARD technology, which is licensed
from Groupmark Canada Limited, a related party. This technology enables
the cards to be used for identification purposes and as debit or charge
cards. The Company intends to focus its marketing efforts on companies
that wish to distribute these cards to their customers as a reward for
their loyalty. Groupmark Canada Limited owns the registered trademark
"SmartCARD" in Canada and has a pending application in the United
States. Groupmark Canada has granted the Company a license to use the
trademark "SmartCARD." Pursuant to the terms of the license agreement,
the Company will pay to Groupmark a royalty of 5% of net sales of
products using the SmartCARD trademark and technology.
F2-7
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
following is a summary of the significant accounting policies followed
in the preparation of these consolidated financial statements.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and all of its subsidiary companies. Intercompany accounts and
transactions have been eliminated on consolidation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of cash on hand and cash deposited
with financial institutions, including money market accounts, and
commercial paper purchased with an original maturity of three months or
less.
Concentration of Cash
---------------------
The Company at times maintains cash balances in accounts that are not
fully federally insured. Uninsured balances as of September 30, 2000
and December 31, 1999 were $65,124 and $533, respectively.
Inventories
-----------
Inventories are stated at the lower of cost (first in, first out
method) or market.
F2-8
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based Compensation
------------------------
The Company accounts for its stock-based compensation plan based on
Accounting Principles Board ("APB") Opinion No. 25. In October 1995,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has determined
that it will not change to the fair value method and will continue to
use APB Opinion No. 25 for measurement and recognition of any expense
related to employee stock based transactions.
Property and Equipment
----------------------
Property and equipment are stated at cost or, in the case of leased
assets under capital leases, at the present value of future lease
payments at inception of the lease. Major improvements that materially
extend the useful life of property are capitalized. Depreciation is
calculated on a straight-line basis over the estimated useful lives of
the various assets, which range from three to seven years. Leasehold
improvements and leased assets under capital leases are amortized over
the life of the asset or the period of the respective lease using the
straight-line method, whichever is the shortest. Expenditures for
repairs and maintenance are charged to expense as incurred.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Income taxes are provided for the tax
effects of transactions reported in the consolidated financial
statements and consist of deferred taxes related to differences between
the basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for operating losses that
are available to offset future taxable income.
Foreign Currency Translation
----------------------------
Transactions are translated into the functional currency at the
exchange rates in effect at the time the transactions occur. Exchange
gains and losses arising on translation are included in the operating
results for the year.
F2-9
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Sales are recorded for products upon shipment of product to customers
and transfer of title under standard commercial terms.
Comprehensive Income
--------------------
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and unrealized gains (losses) on available for sale marketable
securities and is presented in the consolidated statements of
shareholders' equity and comprehensive income. SFAS No. 130 requires
only additional disclosures in the consolidated financial statements
and does not affect the Company's financial position or results of
operations. The Company does not have elements of comprehensive income
for the three and nine months ended September 30, 2000 and for the year
ended December 31, 1999.
Income (loss) per common share
------------------------------
Income (loss) per common share is computed on the weighted average
number of common or common and common equivalent shares outstanding
during each year. Basic Earnings-per-Share ("EPS") is computed as net
income (loss) applicable to common stockholders' divided by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, and other
convertible securities when the effect would be dilutive.
Long-lived assets
-----------------
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, the Company reviews the carrying value of its long-lived
assets and identifiable intangibles for possible impairment whenever
events or changes in circumstances indicate the carrying amount of
assets to be held and used may not be recoverable.
F2-10
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles necessarily requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could significantly differ from those estimates.
Advertising Costs
-----------------
The Company expenses advertising costs as they are incurred.
Advertising costs for the three and nine month period ending September
30, 2000 were $44,231 and $45,390, respectively. The Company did not
incur any advertising costs during the year ended December 31, 1999.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires recognition
of all derivative financial instruments as either assets or liabilities
in consolidated balance sheets at fair value and determines the
method(s) of gain/loss recognition. The FASB issued SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" in June 1999
to defer the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company did not have any derivative
instruments or engage in hedging activities during the nine month
period ended September 30, 2000.
Goodwill and Other Intangibles
------------------------------
Intangible assets are recorded at cost. Goodwill associated with the
purchase of China eMall is amortized on a straight-line basis over a
period of 3 years.
F2-11
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
3. INVENTORIES
On April 29, 1998, the Company acquired approximately 32,000 sets of
printed art reproductions. Each set consists of four full-color
lithograph prints from "The Andover Series" by artist Jim Perleberg.
Each image has a title narrative printed in the margin and is
re-signed, in the plate, by the artist. The management of the Company
have evaluated the market value of the prints and determined that the
market value of the prints is not below their acquisition. The prints
are by a noted artist, and the original Andover Series S/N Limited
Edition lithographs were fully sold.
The Company acquired these sets of prints in exchange for 1,399,992
shares of its common stock valued at $139,999. The Company will be
offering these prints for sale through its own web site and other
Internet web sites.
4. INCOME TAXES
No provision for federal and state taxes has been recorded for the
three and nine month period ending September 30, 2000 or for the year
ended December 31, 1999, since the Company incurred net operating
losses for these periods. Due to the uncertainty surrounding the
realization of deferred tax assets, the Company has recorded a
valuation allowance against its net deferred tax asset.
5. STOCKHOLDERS' EQUITY
Common Stock
------------
In December 1999, the Company commenced a private placement of its
common shares under Rule 504 of Regulation D promulgated under the
Securities Act of 1933 and section 203 (t) of the Pennsylvania
Securities Act of 1972. As of September 30, 2000, the Company has sold
2,583,333 shares for $1,000,000, completing the full offering.
On April 12, 2000, the Company sold 550,000 shares of its common stock
for $110,000, which included warrants to purchase 1,225,000 shares of
its common stock at exercise prices ranging from $0.35 to $0.95. All
warrants expire on or before 180 days from the date of issuance. On May
3, 2000, the Company issued 250,000 shares of its common stock for
$105,000 pursuant to the exercise terms of the warrants.
F2-12
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
The Company has issued 57,500 shares of its common stock in lieu of
cash payments for the settlement of liabilities and services rendered
to the Company by various consultants.
6. STOCK OPTIONS
In 1997, the Company granted stock options to two executive officers.
The options were granted at the fair market value of the stock as
determined by the Board of Directors. Stock options were granted to
purchase 750,000 common shares at $0.30 per share. The options are
immediately vested and expire on December 31, 2001.
In 1998, the Company granted stock options to two executive officers
and a member of the board. The stock options were non-qualified stock
options. The options were granted at the fair market value of the stock
as determined by the Board of Directors. Stock options were granted to
purchase a total of 1,250,000 common shares at $0.40 per share. The
options are immediately vested and expire on December 31, 2002.
7. RELATED PARTY TRANSACTIONS
Groupmark Canada Limited
------------------------
In 1997, the Company entered into a management service agreement with
Groupmark Canada Limited ("Groupmark"), of which the Chairman and Chief
Executive Officer of the Company is the sole shareholder. Under this
agreement, Groupmark provides the Company all management, daily
administrative functions, financial and business advisory services.
Groupmark was also contracted to assist in the technological
development of the "SmartCARD." Contractually, charges for these
services are not to exceed $56,000 per month. The Company has incurred
$220,000 in management fees during the nine-month period ending
September 30, 2000.
Amounts due Groupmark pursuant to this management service agreement as
of September 30, 2000 and December 31, 1999 are $257,027 and
$1,645,868, respectively. Groupmark has the option to accept payment by
way of the Company's common stock at fair market value in lieu of cash.
In March 2000, Groupmark converted $865,868 of the amounts due it under
the management service agreement into 2,500,000 shares of the Company's
common stock.
F2-13
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
Transactions with Corporate Officers and Directors
--------------------------------------------------
On October 13, 1999 the Board of Directors approved issuance of 370,000
and 185,000 shares of the Company's common stock to the Chief Executive
Officer and Chief Financial Officer, respectively. The grants of common
stock were made in lieu of cash compensation. The total market value of
the common stock on the date of grant was $71,500. The shares were
issued to these two individuals in July 2000.
8. COMMITMENTS AND CONTINGENCIES
Legal
-----
The Company is not currently aware of any legal proceedings or claims
that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or
results of operations.
Video Home Shopping, Inc., a Tennessee Corporation
--------------------------------------------------
In December 1996, the Company merged Video Home Shopping, Inc., a
Tennessee corporation. Subsequent to the merger, the new management of
the Company decided not to continue with the business operations of
Video Home Shopping, Inc. In consideration of the closure of Video Home
Shopping, Inc., the Company continues to maintain a reserve for
potential loss contingencies from these operations of $350,000.
The loss reserve is primarily for payroll tax liabilities incurred by
Video Home Shopping, Inc. before its merger VHS Network, Inc. The
Company may be contingently liable for amounts withheld by Video Home
Shopping, Inc. from employees' wages for income taxes, which were not
remunerated to the Internal Revenue Service.
Going Concern Uncertainties
---------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has experienced recurring operating losses and negative cash flows from
operations. The Company's continued existence is dependent upon its
ability to increase operating revenues and/or raise additional equity
financing.
F2-14
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
In view of these matters, management believes that actions presently
being taken to expand the Company's operations and to continue its
web-site development activity provide the opportunity for the Company
to return to profitability. The continued focus on strategic
technological investments will improve the Company's cash flow,
profitability, and ability to raise additional capital so that it can
meet its strategic objectives.
Management raised additional capital, $1,165,000 during the six months
ended June 30, 2000, and is currently in the process of negotiating
additional equity financing with potential investors. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
9. Acquisitions
Acquisition of China eMall Corporation
--------------------------------------
On April 12, 2000, the Company completed the acquisition of all
outstanding common shares of China eMall Corporation, ("eMall") an
e-commerce company, through the issuance of 2,100,000 shares of the
Company's common stock, which had a market value of $1,181,250. eMall
has Preferred Stock outstanding that is convertible into 4,015,000
shares of the Company's common stock. The Company has a 100% interest
in the voting stock of China eMall because of this transaction. The
Preferred Stock of eMall is non-voting, and it is convertible into the
Company's common stock at the discretion of the holders of eMall
Preferred Stock. The eMall Preferred Stock can be redeemed by the
Company at the earlier of: (a) three years from the date on which a
registration statement for the Common shares of the Company is filed
with the Securities and Exchange Commission in the US; or (b) five
years from the date of issue, (April 12, 2000). The historical
operations of eMall before the date of the acquisition were deminimis.
The transaction has been accounted for as a purchase and, the purchase
price has been allocated to the intangible assets acquired, including
domain-name, acquired work-force, and goodwill. The purchase price was
allocated as follows:
Intangible assets
Domain name $ 75,000
Workforce 25,000
Goodwill 1,081,250
---------
Total $ 1,181,250
---------
F2-15
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
The intangible assets are being amortized over 3 years on a
straight-line basis.
Acquisition of Exodus Acquisition Corporation
In May 2000, the Company merged with Exodus Acquisition Corporation, a
California corporation, and a fully reporting company under regulation
12(g) of the Securities Exchange Act of 1934. Exodus has no material
assets or liabilities. Under terms of the acquisition, The Company
issued 500,000 shares of the Company's common stock, (having a market
value of $125,000) for all the outstanding shares of Exodus Acquisition
Corporation. The acquisition was accounted for using the purchase
method of accounting. To conclude this transaction, the Company
incurred $90,070 in acquisition related expenses. The historical
operations of Exodus before the date of acquisition were deminimis.
10. Intangible Assets
Intangible assets at June 30, 2000 consist of the following:
Domain name $ 75,000
Workforce 25,000
Goodwill 1,081,250
---------
$1,181,250
Less: Accumulated amortization (180,147)
---------
$1,001,103
Amortization expense for the three and nine months ending September 30,
2000 was $98,439 and $180,147, respectively.
11. Registration Statement
On October 26, 2000, the Company filed an amended Registration
Statement, Form SB-2, pertaining to the sale of 9,657,000 shares of its
common stock, of which 4,392,500 shares are issued and outstanding, and
5,265,000 shares are issuable upon exercise of options, warrants and
other conversion privileges to acquire common stock. The shares were
issued, or are issuable upon conversion or exercise of securities,
which were issued, by the Company in private placement transactions.
The Securities and Exchange Commission is currently reviewing the
Registration Statement filing.
F2-16
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
VHSN's articles of incorporation and by-laws provide that the company shall
indemnify any person, who was or is a party to a proceeding by reason of the
fact that he is or was a director or officer of VHSN, or is or was serving at
the request of VHSN as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and may
indemnify any person, who was or is a party to a proceeding by reason of the
fact that he is or was an employee or agent of VHSN or is or was serving at the
request of VHSN as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with such proceeding
if he acted in good faith and in a manner he reasonably believed to be or not
opposed to the best interests of VHSN, in accordance with, and to the full
extent permitted by law.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Table 8 provides a break down of all expenses of this offering. None of the
expenses will be paid by the Selling Securityholders.
Table 8
---------------------------------------- ---------------------
Item Cost
---------------------------------------- ---------------------
Registration Fee $547.32
---------------------------------------- ---------------------
Federal Taxes 0
---------------------------------------- ---------------------
State Taxes and Fees 0
---------------------------------------- ---------------------
Transfer Agent's Fees 0
---------------------------------------- ---------------------
Printing and Engraving* $5,000
---------------------------------------- ---------------------
Legal Fees* $25,000
---------------------------------------- ---------------------
Accounting Fees* $10,000
---------------------------------------- ---------------------
* estimated amount
RECENT SALES OF UNREGISTERED SECURITIES
Starting in April, 1997 and continuing into 1998, VHSN, under its current
management continued an offering pursuant to Rule 504 of Regulation D
promulgated under the Securities Act of 1933. Each purchaser completed a
subscription agreement. VHSN raised a total of $416,492 pursuant to this
offering with the issuance of common shares as shown below.
29
<PAGE>
Purchaser Number of Shares
--------- ----------------
Tomorrow's Stock Today, Inc. 945,000
Robert Seary 759,000
Dana Sieber 650,000
Thomas Michael Vitucci 700,000
On May 8, 1998, VHSN issued 5,000,000 common shares to Groupmark Canada Limited
based on a price of $0.10 per share in full satisfaction of an outstanding
promissory note in the amount of $500,000. The exemption from registration
relied on by VHSN is Regulation S promulgated under the Securities Act of 1933,
as amended. The promissory note had been issued to Groupmark Canada Limited for
non cash consideration as part of the consideration received by Groupmark when
it sold all the shares of VHS Network Inc. (a Manitoba corporation) to VHS
Acquisition Inc. in April 1997.
On May 14, 1998, VHSN issued 1,399,992 common shares to Rogue-Mountain Corp. in
an arm's length transaction for the purchase of inventory for resale valued at
$139,999. The inventory consists of full colour lithographic prints from a sold
out limited edition release, "The Andover Series" by artist Jim Perleberg. As of
October 18, 2000 none of this inventory has been sold. The exemption relied on
by VHSN is section 4(6) of the Securities Act of 1933, as amended.
On October 13, 1999 the directors passed a resolution to issue 370,000 common
shares to Elwin D. Cathcart and 185,000 common shares to David Smelsky in lieu
of salary as officers of VHSN. The exemption from registration relied on by VHSN
is Regulation S promulgated under the Securities Act of 1933, as amended. The
share certificates were issued in July, 2000.
In December, 1999 VHSN commenced another offering pursuant to Rule 504 of
Regulation D promulgated under the Securities Act of 1933 to raise a maximum of
$1,000,000. On December 20, 1999, VHSN issued 150,000 common shares to Steven
Rossi and 350,000 common shares to Kevin Waltzner as payment for consulting
services rendered to VHSN pursuant to consulting agreements dated December 20,
1999, and December 16, 1999, respectively. The exemptions from registration
relied on are provided by Rule 504 of Regulation D, promulgated under the
Securities Act of 1933, as amended and section 203 (t) of the Pennsylvania
Securities Act of 1972, as amended. During the first three months of 2000 VHSN
issued 2,083,333 common shares to Paul Winters at prices of $0.10 and $0.60 for
aggregate proceeds of $950,000. The purchaser was provided with a private
placement memorandum, completed an investor questionnaire and a subscription
agreement. This private placement was made in reliance on the exemption from
registration provided by Rule 504 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act") and section 203 (t) of
the Pennsylvania Securities Act of 1972, as amended. Shares sold pursuant to
this 504 offering are summarized below.
30
<PAGE>
Purchaser Number of Shares Price
--------- ---------------- -----
Steven Rossi 150,000 $0.10
Kevin Waltzner 350,000 $0.10
Paul Winters 600,000 $0.10
Paul Winters 1,483,333 $0.60
On April 12, 2000 pursuant to a share exchange agreement for the acquisition of
China eMall Corporation, VHSN issued 2,100,000 common shares and further
allotted 4,015,000 common shares for issuance on exchange of the Class B Special
Shares of China eMall for common shares of VHSN. The holders of the Class B
Special Shares can exchange any or all of their Class B Special Shares for
common shares of VHSN at any time however if any Class B Special Shares remain
issued and outstanding after the expiration of the earlier of (A) three years
from the date on which a Form SB-2 or similar filing has been filed with the SEC
with respect to the common shares of VHSN and the SEC has reach a position of no
further comment, and (B) five years after which such Exchangeable Shares were
issued, then China eMall Corporation may redeem the Class B Special Shares on
payment of one common share of VHSN for each Class B Special Share. The
exemption from registration relied on by VHSN is Regulation S promulgated under
the Securities Act of 1933, as amended.
The 2,100,000 shares were issued as follows:
Purchaser Number of Shares
--------- ----------------
Gang Chai 350,000
Qin Lu Chai 350,000
Qing Wang 350,000
Tai Xue Shi 350,000
Forte Management Corp. 700,000
The 4,015,000 Class B Special Shares of China eMall Corporation were issued as
follows:
Purchaser Number of Shares
--------- ----------------
Gang Chai 698,502
Qin Lu Chai 698,498
Qing Wang 672,000
Tai Xue Shi 672,000
Charles He 1,274,000
In April, 2000 VHSN issued 50,000 common shares to Alexander Stewart for the
provision of legal services. The shares were valued at $0.50 and were issued in
reliance upon the exemption from registration under Regulation S promulgated
under the Securities Act of 1933, as amended.
In April, 2000 VHSN completed a private placement with Forte Management Corp. a
non-US investor operating outside the United States for the issuance of 550,000
common shares and 1,225,000 share purchase warrants for proceeds of $110,000.
The warrants have the following expirations dates and exercise prices.
31
<PAGE>
Number of Warrants Expiration Date Exercise Price
------------------ --------------- --------------
400,000 June 12, 2000 $0.35
500,000 July 11, 2000 $0.50
200,00 August 10, 2000 $0.60
125,000 October 9, 2000 $0.95
As of the date hereof 250,000 warrants have been exercised for proceeds of
$105,000 to VHSN.
In March, 2000 VHSN issued 2,500,000 common shares to Groupmark Canada Limited
in settlement of $865,868 owing under the management services agreement between
VHSN and Groupmark. VHSN relied upon the exemption from registration under
Regulation S promulgated under the Securities Act of 1933, as amended.
On May 6, 2000 VHSN acquired all the issued and outstanding shares of Exodus
Acquisition Corporation pursuant to an Agreement of Plan of Reorganization
wherein the shareholders of Exodus, BAC Consulting Corporation, received 500,000
common shares of VHSN. VHSN relied upon exemption from registration under Rule
145 promulgated under the Securities Act of 1933, as amended.
On May 5, 2000 VHSN issued 10,000 common shares to David Johnston in partial
settlement of an action brought by David Johnston against VHSN.
32
<PAGE>
2.1 Agreement and Plan of Reorganization between VHS Network, Inc. and
Exodus Acquisition Corporation, dated May 6, 2000.*
3.1 Articles of Incorporation for VHS Network, Inc.*
3.2 Articles of Merger for VHS Network, Inc. (Exhibit A referred to in the
Articles of Merger of VHS Network, Inc. is filed as a separate document
as Exhibit 10.6 hereof)*
3.3 Articles of Amendment for VHS Network, Inc.*
3.4 By-laws of VHS Network, Inc.*
4.1 Specimen Stock Certificate.*
5.1 Opinion of legal counsel on the legality of the securities being issued
stating that when sold they will be legally issued, fully paid and
non-assessable.*
10.1 Share Exchange Agreement made April 12, 2000 among VHS Network, Inc.,
China eMall Corporation, Gang Chai, Qin Lu Chai, Uphill Capital Inc.,
Charles He, Qing Wang and Forte Management Corp.*
10.2 Consulting Services Agreement between VHS Network, Inc., G.C.
Consulting and Investment Corp. and Gang Chai.*
10.3 Licence Agreement between Groupmark Canada Limited and VHS Network,
Inc. dated January 1, 2000.*
10.4 Management Services Agreement between VHSN and Groupmark Canada Limited
dated April 1997.*
10.5 Stephen Rossi Consulting Agreement between VHS Network, Inc. and
Stephen Rossi dated December 20, 1999.*
10.6 Agreement and Plan of Merger dated as of December 26, 1996 made among
Ronden Vending Corp., Ronden Acquisition, Inc., Video Home Shopping,
Inc. (a Tennessee corporation), Progressive Media Group, Inc. and
Pamela Wilkerson.*
10.7 Agreement and Plan of Merger dated as of December 30, 1996 between
Ronden Vending Corp. and Ronden Acquisition, Inc.*
10.8 Agreement and Plan of Reorganization dated April 10, 1997 among VHS
Network, Inc. and VHS Acquisition, Inc. and VHS Network (Canada), Inc.*
10.9 Schedules to Exhibit 10.1
16.1 Letter from Weinberg & Company.*
21.1 List of subsidiaries, jurisdiction of incorporation and business
names.*
23.1 Consent of lawyer giving opinion to be used herein. (Included in
Exhibit 5.1)*
23.2 Consent of Berg & Company, LLP.
27.1 Financial Data Schedule.*
* Previously filed
33
<PAGE>
UNDERTAKINGS
VHSN hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended (the 'Act');
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement;
(iii)include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering of those securities.
(3) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant under Rule 424(b)(1) or (4), or 497(h) under
the Act as part of this Registration Statement as of the time the Commission
declared it effective.
34
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Toronto,
Ontario, Canada on the 24th day of November, 2000.
VHS NETWORK, INC.
Per: /s/ Elwin Cathcart
-----------------
Elwin Cathcart, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Dated: November 24, 2000 /s/ Elwin Cathcart
------------------
Elwin Cathcart, Director, Chairman
and Chief Executive Officer
Dated: November 27, 2000 /s/ David Smelsky
-----------------
David Smelsky, Director and Secretary
Dated: November 24, 2000 /s/ Thomas Roberts
------------------
Thomas Roberts, Director
Dated: November 30, 2000 /s/ Gang Chai
-------------
Gang chai, Director and Chief
Operating Officer
35
